Case Study: Family Owners Sell an Accountancy Firm to a Private Equity Buyer

A family-owned accountancy firm received an offer from a buy-and-build platform backed by private equity. The deal was valued between £5m and £20m. Here is how our team approached the tax, and what it meant for the sellers.

The client

The shareholders were members of one family who owned the firm together. The buyer was a platform that grows by acquiring other firms, and it wanted the family to take part of the price in shares in its own group.

The challenge

The buyer's offer combined four different elements: cash on completion, loan notes, an earn-out and a rollover into shares in the buyer's group. Each is taxed in its own way and at its own time. Several other problems sat on top of that:

• Business Asset Disposal Relief was under threat. The family held investments, mainly land and property, inside a subsidiary. That raised a real question over whether the group counted as a trading group.
• One shareholder did not meet the officer or employee condition. A spouse had worked in the business, but the role had never been formalised.
• One family member held only 3%. That is under the 5% minimum, so those shares could not qualify for the relief.
• The buyer's first draft of the tax terms was wide. It asked for broad tax warranties and indemnities from the sellers.
• Time was against the family. On a buy-and-build platform, every later acquisition dilutes the share of the group that rolled-over sellers receive. Joining early is worth more, so delay carried a real cost beyond the tax itself.

What we did

• Separated the investment property first. We moved the property out of the trading group, so the buyer was acquiring a clean trading business and the relief was protected.
• Protected the relief where it was available. We made sure the spouse's role was properly documented in time to cover the two-year condition. We were open from the start that the 3% holding would not qualify, so our planning concentrated on the shareholdings that could.
• Applied for HMRC clearance before completion.
• Structured each part of the price so that the cash, loan notes, earn-out and rollover shares were taxed as intended and at the right moment.
• Negotiated the tax terms of the sale agreement with the sellers' lawyers.

The outcome

• Business Asset Disposal Relief was secured for the shareholders who qualified.
• HMRC clearance came through in time and did not hold up the deal.
• The tax warranties and indemnities that were agreed were narrower than the buyer first proposed.
• Completion took place on the original timetable, so the family joined the platform when planned.

If you are weighing an offer that includes rollover shares, loan notes or an earn-out, our team can model each element and the timing of the tax before you commit. Book a call to talk it through.

For a closer look at selling or buying a business, see our specialist practice, Transaction Tax Partners.