Third-Party Sale of an Environmental Engineering Company for £13.5m

Third-Party Sale of an Environmental Engineering Company for £13.5m

The shareholders of an owner-managed environmental engineering company agreed to sell to a third party for £13.5m. The price was paid partly in cash, partly in deferred consideration including loan notes, and partly by rolling equity into the buyer's group. This is how our team advised the shareholders from the first structuring discussions through to completion.

At a glance

• Client: the shareholders of an owner-managed environmental engineering company, including management and minority shareholders
• Deal: sale to a third party for £13.5m, including an equity roll-up into the acquiring group
• Consideration: cash, deferred consideration including loan notes, and new shares in the buyer's group
• Complications: historic shareholding issues, several classes of shareholder and an extensive tax due diligence process run by the purchaser
• Our role: shareholder advice report, the seller's tax due diligence responses, review of the share purchase agreements, HMRC clearance and a clean-up of the share capital

The client

The client was the group of shareholders in an owner-managed environmental engineering company. The shareholders were not all in the same position. Some were managers, some were minority investors, and the company had more than one class of share.

The challenge

A sale with three different forms of consideration is more complicated than a straight cash sale. Each part is taxed differently, and the way the deal is documented decides how each shareholder is treated.

Three things made this engagement particularly demanding.

• Historic shareholding issues. The share capital history was not clean. It needed to be understood and put right before the buyer's advisers found the problems for themselves.
• Multiple classes of shareholder. Management and minority shareholders had different agreements, so each needed its own review.
• An extensive tax due diligence process. The purchaser's tax review was thorough. Every technical query needed a clear, supported answer, and the answers needed to be consistent across the whole transaction.

What we did

• Prepared a comprehensive shareholder advice report. We modelled the capital gains tax (CGT) consequences of the proposed transaction for the shareholders, including the treatment of the cash, the loan notes and preference shares, and the equity roll-up.
• Led the seller's responses to the tax due diligence process. We answered the technical queries and supplied supporting information to resolve issues as they arose throughout the transaction, so the shareholders were not left to deal with the buyer's advisers alone.
• Worked with the solicitors on the sale documents. We reviewed both the management share purchase agreement and the minority share purchase agreement, and recommended amendments to protect the intended tax outcomes.
• Prepared and obtained HMRC clearance. The clearance covered the sale, the deferred consideration and the equity roll-up.
• Found and resolved the historic share capital issues. These included undocumented share transfers, historic investor rights, Enterprise Management Incentive (EMI) option arrangements, dividend payments on exit-only EMI shares, and share buybacks that had to be completed before completion of the sale.
• Managed the engagement day to day. One team ran the work from the initial structuring to completion, so the shareholders had a single point of contact for the tax side of the deal.

The outcome

• The shareholders received tax advice that set out their position on each form of consideration before they committed to the deal.
• The buyer's tax due diligence was answered by the seller's side with technical responses and supporting information throughout.
• Both share purchase agreements were reviewed with the intended tax outcomes in mind.
• HMRC clearance was prepared and obtained for the sale, the deferred consideration and the equity roll-up.
• The historic share capital issues were identified and resolved before completion.

Why it matters

Sellers often think about tax only once the price has been agreed. By then the share capital history, the structure of the deferred consideration and the wording of the sale documents may already be limiting what can be done. Looking at all three early gives the shareholders more control. It also means that when the buyer's due diligence arrives, the answers are ready.

If you are considering selling your company, see our guide to selling a business, or book a call with our team.