Planning a company sale: steps, price and tax

Prepare a company sale well in advance

A successful company sale starts long before the first buyer appears. Buyers pay for recurring, transferable profit. Anything that weakens that profit pushes the price down. So get the business ready first.

• Remove assets unrelated to the activity from the balance sheet.
• Document key contracts and intellectual property.
• Reduce dependence on the owner and on a few large clients.
• Update your accounts and your financial forecast.

This work also speeds up due diligence. It finally limits the warranties the buyer will request.

Share deal or asset deal: two ways to sell

The structure you choose shapes the whole company sale.

Share deal: transferring the shares

The buyer takes over the shares. The target keeps its legal personality, contracts, licences and debts.

• Strength: continuity, with no contract-by-contract transfer.
• Drawback: the buyer also inherits hidden debts.

The buyer therefore demands solid indemnities. An existing shareholders' agreement may also require pre-emption or approval before the deal.

Asset deal: transferring assets

The buyer chooses what to take over: goodwill, equipment, stock, trademarks or contracts. The selling entity survives with the rest.

• Strength: the buyer normally avoids hidden debts.
• Drawback: each contract usually needs the other party's consent.

Employees attached to the transferred activity normally move with it, under Collective Agreement No. 32bis. Also request the tax and social certificates the law provides for. Without them, the buyer may have to answer for some of the seller's debts.

Setting a defensible price

Three valuation methods dominate.

• The asset-based method: revalued net assets.
• The multiples method: a multiple of EBITDA that varies by sector and size.
• The DCF method: discounting future cash flows.

In practice, valuers combine these approaches. Take a purely illustrative example. A business generates €200,000 of EBITDA and the parties use a multiple of 5. Enterprise value then reaches €1,000,000. You then deduct net debt to get the price of the shares.

The buyer will always pick the most cautious assumption. A credible financial forecast therefore supports the price of any company sale.

The five steps of a company sale

Each step protects one of the two parties.

1. Confidentiality and first contacts

Before sharing a single figure, have a non-disclosure agreement signed. Also screen out candidates who mainly want to study a competitor.

2. Letter of intent

It sets the indicative price, the structure, the timetable and an exclusivity period. In principle, it does not commit anyone to complete the company sale. The exclusivity and confidentiality clauses do bind the parties, however.

3. Due diligence

The buyer examines the target from several angles.

• Financial: accounts, cash, debts and off-balance-sheet commitments.
• Legal: contracts, disputes and intellectual property.
• Tax: reassessment risks.
• Employment: contracts and pending disputes.

4. Purchase agreement

This central contract covers several points.

• The price and payment terms, sometimes with an earn-out based on future results.
• The seller's representations and warranties.
• A non-compete clause, limited in time and place.
• Conditions precedent, such as securing finance.

5. Closing

Closing completes the company sale: transfer of shares or assets, payment of the price and delivery of documents. Formalities follow, such as updating the share register or the Crossroads Bank for Enterprises.

Tax aspects of a company sale

The tax treatment depends on who sells.

Individual sellers

Tax on a gain on shares depends on your situation and on the rules in force in the year you sell. In an asset deal, a sole trader who stops trading may also pay tax on capital gains. So have the calculation checked before signing.

Corporate sellers

In a share deal, the gain on shares can remain tax-free if the selling entity meets the dividends-received deduction conditions. Our guide to dividend withholding in Belgium explains those conditions. In an asset deal, the gain falls into taxable profit for corporate income tax.

For VAT, transferring a universality of assets or a branch of activity normally falls outside the tax.

Mistakes that derail a company sale

These are the mistakes we see most often.

• Negotiating the price before choosing the structure.
• Opening the data room without a non-disclosure agreement.
• Underestimating the indemnities the buyer will request.
• Forgetting change-of-control clauses in key contracts.
• Letting cash deteriorate during negotiations.

If the company sale falls through

Other routes exist. A partner can take over the shares, possibly through a share buyback. A group may prefer a merger procedure. Finally, a voluntary liquidation closes the business properly. With Juristelo, you model each scenario and enter negotiations with solid numbers.