The following article is by Chris Lane, partner, Kingston Smith LLP and first appeared in Caterer & Hotelkeeper magazine. They have been reprinted with kind permission from the magazine.
26 January 2007
The problem
Jessica has been successfully running a French restaurant in Leeds for five years. The time is right for her to expand her business and she has decided that her best route for her is through acquisition. What should she be aware of from a tax and acquisition planning perspective before she goes ahead?
The law
Successful expansion by way of an acquisition needs careful planning from the outset. Your plan needs to cover how you are going to fund the acquisition, what other resources you’ll need, and how the enlarged business will be managed. With any acquisition you will potentially be paying more than if you set up the new site from scratch. You must therefore carry out careful due diligence to make sure you understand what the strengths and weaknesses are for the each business opportunity. It is essential to consider seasonality when expanding.
There are two ways to acquire an existing business. On the assumption that it’s a limited company, you can purchase the shares from the current owner. Alternatively, you can purchase the trade and any specific assets that you need from the current owners. The advantages of purchasing the trade are that you just acquire the assets that you want and therefore there should be fewer surprises. Also any cost of acquiring the goodwill of the trade will be depreciated in the future and this depreciation is an allowed deduction for tax purposes against the future profits of the business. The vendor is most likely to want to sell you their shares in the company as this will reduce their potential capital gains tax charge. Of course the downside of buying a limited company is that you buy all the assets, but with all the liabilities. You will therefore inherit any ‘skeletons in the cupboard’ as well. The end result will be a negotiation between buyer and seller and will depend upon who is more desperate to buy or sell. Under both situations the employees rights and obligations will become your responsibility under the TUPE rules (Transfer of Undertakings Protection of Employment Regulations).
If you are buying the whole company then it is very important to cover as many eventualities as possible by way of warranties and indemnities from the vendor. This means that if something does come to light in the future when you own the business, then you will be able to make a claim. You’ll also need to decide whether you are going to combine the new acquired business together with your existing business. This will depend upon if you need to keep it apart because you may have partners or outside investors in the new business or possibly managers that you wish to incentivise with an equity share option scheme, but do not want to include the original business.
To do checklist
- Make sure that you understand why you wish to expand.
- Fully research the new business and its location.
- Have a strategic plan on how you will manage the enlarged business.
- Consider how the new business is going to fit in with your existing business.
- Be realistic - stick to your valuation and don’t be pressurised into overpaying for the new business.
- Appoint an experienced advisor to assist you through the project.
- Get independent advice from your advisors as to the feasibility of the project.
- Have a contingency plan for the unexpected.
Beware!
Remember that corporation tax limits are divided by the number of associated companies. Therefore if you have two companies, the small company rate of 19% on the first £300,000 of profits is halved for each company to £150,000.
Contacts
Chris Lane is a partner at Kingston Smith, one of the UK’s top 20 accountancy firms, and can be contacted for further advice on: 020 7566 4000 or clane@kingstonsmith.co.uk. Chris and his team specialise in providing business and financial advice to the hospitality sector.
