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Exit Planning

Selling Your Company

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If someone wants to discuss buying your company, do not forget the employee share scheme or it could cost you, your company and your employees unexpected tax and costs.


You have a really good business that you and your team have been working hard over the past years to establish and develop. You might have in mind an exit price, have some idea of terms you would accept (paper, earn-outs, retentions) but you also need to think about options and other share incentives.

Getting it wrong means options and shares could lose tax advantages, new options might miss tax benefits, a valuable Corporation Tax deduction is lost and there is an Income Tax bill (plus national insurance) instead of a Capital Gain or invalidate the options. This can be expensive and demotivating, so let us help you plan ahead.

Existing Options

For existing options, once control passes to the potential purchaser the approved status of a Company Share Option Plan (CSOP) or Share Incentive Plan (SIP) or the qualifying status of an Enterprise Management Incentive (EMI) is lost together with valuable Corporation Tax relief. Key points:

  • Make sure nothing in the heads of agreement (Heads) or non-disclosure agreement (NDA) or any exclusivity agreement restricts you or the company from acting without the consent of the potential purchaser. For example, beware of any restriction on signing new business terms or incurring debt.
  • Look out for any unusual terms in an NDA or exclusivity agreement and if uncertain seek specific advice from your lawyer, accountant or RM2 in respect of the share scheme.
  • If there is a deferred completion after exchange under the Share Purchase Agreement (SPA), check if effective control passes at exchange.

Are your annual returns and paperwork relating to options or employee shares up to date?

The potential purchaser will ask for and seek evidence as part of their Due Diligence (DD). Remember, if RM2 administers your plan, we will keep everything up to date and make it easy for you to comply with requests for information. One less thing to think about at a very busy time.

Existing Shareholders

Do you or any of the existing shareholders expect to obtain Entrepreneurs' Relief (ER) and the opportunity for the effective tax rate to drop to 10%? If so you will want to help everyone to maximise the opportunities to benefit so bear in mind the following:

  • Shareholders need to have at least 5% of the issued share capital (and 5% of the voting rights) when they sell (unless they received the shares from an EMI Scheme) for ER. This excludes shares held by a spouse or related person. Watch out if new shares are being issued before the sale reducing your share below 5%. Take advice, there may be a solution here.
  • Shareholders must have held the shares for 12 months or more (or the EMI option granted at least 12 months before). The relevant date of sale is usually the exchange of contracts, not the date of the completion. Carefully calculate the dates or the tax liability may increase to 28%.
  • Ensure the company was a trading company or the holding company of a trading group.

New options

Were you planning to grant options or had you promised participation to specific employees? If so, you can still make grants of new options but bear in mind the following:

  1. Do the pre-completion terms prevent granting new share rights without consent? 
  2. Approved plan grants are prohibited if control has passed to the prospective acquirer.
  3. Where you need to agree valuations with HMRC you must fully disclose any offers. This will be confidential and HMRC appreciate that not all deals complete, but it affects the value. RM2 are experienced at negotiating such matters with HMRC on behalf of client companies.

Sale Price

On a sale the company may be valued as a whole (rather than a price per share) with the value divided between both existing shareholders and new shareholders who exercise options immediately before the sale.

Existing shareholders might have warranties and indemnities under the SPA and may suffer retentions or may benefit from earn outs. If the price is not the same per share for everyone, take advice to ensure there is no additional tax liability for employees or director shareholders as a result of an uneven split.

Employee Benefit Trusts (EBT)

These arrangements are commonly used in exit strategies, succession planning, management buy-out or buy-in situations. Through the Employee Benefit Trust (EBT), shareholders are able to trade shares and receive cash payments.

A retiring shareholder can sell shares into trust and these can then be used for the purposes of making awards of shares or options to successor members of the management team. These awards can usually be made in a way that is tax efficient, or at least defers tax until an exit event occurs, such as company sale, that provides the liquidity needed to settle the tax charge. There may also be tax advantages for the vendor shareholder, and corporation tax relief on the benefits passing to employees.

The source of shares acquired by the trustees of an EBT will be at the trustees’ discretion. The choices available to them will include subscribing for newly issued shares from the Company or purchasing shares from existing shareholders should such shares be available. Where the trustees acquire shares from an existing shareholder it will be necessary to draw up a formal share sale / purchase agreement in respect of each disposal.

How RM2 can help you

RM2 can support you and your business in connection with employee and director shares at all the stages of growth. We can help start-ups to expand, entrepreneurial businesses to make acquisitions, growing companies to take on new investors, companies to float and shareholders to sell their successful businesses. To speak with a member of the RM2 directly, call us on 020 8949 5522 or get in touch via enquiries@rm2.co.uk.


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