How to extract assets prior to sale of your business?

Typically, for owners, selling their company represents the culmination of years dedicated to hard work and building value. However, prospective buyers might not be interested in acquiring all of a company's assets, necessitating some pre-sale restructuring.

Why might a purchaser opt out of acquiring all assets? Owners often operate their businesses through a single company without much regard for future sales, focusing more on operational aspects than exit strategies.

Situations where buyers may not wish to acquire all assets include scenarios where the company operates multiple businesses and only one is up for sale, or when the purchaser doesn’t value the company's property, which the seller intends to retain. Likewise, if the company holds investment assets that the seller plans to keep, the purchaser might not want them.

In such cases, the assets not being acquired by the purchaser (termed 'non-core assets') need to be separated from the company.

Option 1 – Increase consideration for shares

One possibility is to raise the equity price by the value of the non-core assets and stipulate in the Sale and Purchase Agreement (SPA) that the additional consideration will involve transferring the non-core assets from the buyer to the seller.

This approach might increase the consideration for the shares sold, potentially leading to a higher capital gain or reduced capital loss for the seller. However, at the company level, transferring the non-core assets could trigger taxable profits and potential tax liabilities, making this option less tax-efficient.

Additionally, the method of extracting assets from the company could result in tax implications for both the purchaser and seller, making this option generally unsuitable due to substantial tax charges.

Option 2 – Hive down

The company could transfer the business and assets to a new company, which is then sold. This might offer a tax-neutral transfer initially, but the sale proceeds will be received by the company, not the seller directly.

Option 3 – Hive up

A new holding company could be inserted above the company, and the non-core assets moved up to it. This approach might be relatively tax-efficient, but the sale proceeds will remain in the new holding company.

Option 4 – Demerger

Separating the business to be sold from non-core assets via a demerger might offer a tax-neutral method for extracting non-core assets. However, this option might be complex, requiring significant professional time and might involve stamp duty costs.

The preferred option depends on the unique circumstances. Hive down or hive up might retain sales proceeds within a company, which may not be favorable for most owner-managers expecting direct receipt of the sale proceeds. A demerger could be the most tax-efficient but also the most costly to implement.

Early exploration of these options before contemplating a sale can be beneficial, so please contact our team in you need assistance with planning ahead of your business sale.