Selling a professional services firm to a private equity platform

The client

The family shareholders of a professional services firm, selling to a private-equity-backed buy-and-build platform. The deal was worth between £5m and £20m.

The challenge

The buyer offered a mix of cash at completion, loan notes, an earn-out and a rollover into shares in the buyer's group. Several issues stood in the way of a tax-efficient sale:

• Business Asset Disposal Relief was at risk. Family investments, mainly land and property, were held in a subsidiary. That called into question whether the group was a trading group.
• One shareholder didn't meet the officer or employee condition. A spouse's role in the business had never been formalised.
• A family shareholder held only 3%. That's below the 5% threshold, so their shares couldn't qualify for the relief.
• Complex consideration. Each element of the price (cash, loan notes, earn-out and rollover) is taxed differently and at different times.
• Wide tax protections in the sale agreement. The buyer's first draft asked for broad tax warranties and indemnities.
• Timing mattered. On a buy-and-build platform, the rollover is worth more the earlier you join, because each later acquisition dilutes the slice of the group you receive. Delay had a real cost.

What we did

• Demerged the property first. We separated the investment property from the trading group, so the business going to the buyer was a clean trading group.
• Protected the relief for the main shareholders. We made sure the spouse's role was formalised in time to meet the two-year condition. We were clear from the outset that the 3% holding would not qualify, so the planning focused on the shareholdings that could.
• Obtained HMRC clearance before completion.
• Structured the consideration so the cash, loan notes, earn-out and rollover were each taxed as intended, and at the right time.
• Negotiated the tax terms of the sale agreement alongside the sellers' lawyers.

The outcome

• Business Asset Disposal Relief was secured for the qualifying shareholders.
• HMRC clearance was granted in time, without delaying the deal.
• The tax warranties and indemnities agreed were narrower than the buyer's first draft.
• The deal completed on the original timetable, so the sellers joined the platform when planned.