Inheritance

Someone who has owned a business for at least two years can give away shares, business property or its assets through inheritance rules while they are still alive. Business relief on inheritance tax at a 100% rate is available for their shares if it is an unlisted company, and 50% relief is available for the property or assets that qualify. The recipient must keep them as a going concern until the death of the donor if they want to keep the relief, although they can replace the property or assets – like machinery – with something of equal value if it is for use in the business.

 

Seek support

Selling a business, particularly one you’ve spent your working life in, is stressful and a significant wrench. Owner-operators must work with advisers, because it can be difficult to cope with remaining the driving force behind the business while being preoccupied by the sales negotiations.

“While they’re focused on the sale it’s important that the business’s results don’t go backwards,” said Mike Jones of ASE Global. Owner-drivers could also ask a senior colleague to help with providing answers during the due diligence process, perhaps suggesting it is for an audit by the bank so that the confidentiality is maintained, said Mark Traynor, partner at HRC Law.

 

The workforce

Staff churn is a challenge for motor retail, so assessment of the workforce in an acquisition target is a very important part of the deal, said ASE Global chairman Mike Jones. If buying a failing business, the buyer will implement their own way of working, which will tend to drive out the people they would want to leave, and motivate those who they will need to stay. But with a more stable business, the possibility of key personnel leaving is a real danger, particularly where the acquirer is entering into a new brand and does not have knowledge of the franchise’s inner workings, such as which cars to stock or not, and how the bonuses work.

 

Completion accounts

If it’s a share sale, the business is sold with all the liabilities as well, which means an acquirer will want to make a completion accounts calculation. This is effectively an audit of the business being bought, to ensure the balance sheet reflects what the acquirer expected, that stock is valued the right way, and details any liabilities and payments due to staff for bonuses accrued or holiday. Afterwards, the price of the business goes up or down depending on whether the target value aimed for is exceeded or not. “It is a way of the buyer being able to adjust the price after they have bought the company,” said Keith Melling, partner of Napthens law firm. “It is important that the legal and accountancy team are involved in working closely on how that is structured.”

 

Property

If a company is trading from leasehold premises, the landlord’s consent to transfer the lease is likely to be required for a business and asset sale, and in a share sale there is an ongoing liability to the landlord for the lease.

Buyers must be careful of who will be liable for dilapidations – if only a short period remains on the lease and the building requires work to put it back into a good state, ensure this has been taken into account in the property valuation, perhaps by negotiating a price reduction or putting money into an escrow account.

If the buyer intends to relocate the business, that must be considered as part of the process and the tenant could be asked to negotiate with the landlord for a surrender of the lease.

 

Retain the seller

If the business seller is a crucial aspect of the target business’s success, the acquirer can negotiate an elongated period of handover, tying in the seller through an employment contract or service agreement so that business continues as usual during the transition. In such cases, the acquirer should consider negotiating an earn-out clause in the sale agreement, which can hold back an element of the consideration to be paid to the seller at a later point only if specified performance criteria are achieved, such as maintaining profitability.

“Change always brings huge levels of disruption. Staff will be nervous, particularly if going from a smaller site to a massive plc, so keeping the figurehead on board will help with that transition. But, ultimately, people have to find their own way,” said Mike Jones of ASE.

“For some people, however, being taken over can be a huge opportunity to grow within a larger organisation and take on areas of responsibility that weren’t available before.”

 

Stock take

Sellers – make sure you are clear about the stock valuation policies the buyer is applying. Pay attention to the way they will value the demonstrators, the new vehicles (allowing for preparation costs and volume discounts), and the used car stock. “It is really important to reach an agreement at an early stage because you don’t want to negotiate, then at the 11th hour, after completion, have a

disagreement about the method of valuation,” said Keith Melling, of Napthens. With demonstrators, there can be a debate on how they are depreciated, and on what value the seller is adding on in preparation and extras and taking off for manufacturer rebates.

 

Restrictive covenants

These legal tools can be used to protect the legitimate business interests of the acquirer. Dealer groups acquiring a business from a young entrepreneur may wish to negotiate a non-compete clause to restrict the entrepreneur from starting another dealership within a specified timescale and geographical area, which might impact on the short-term prospects of the original business. A non-solicitation clause is another restrictive covenant, which prevents the poaching of customers and suppliers.