Issues to be aware of when buying or selling a business during Covid-19
Kirsty Davey, Partner and Head of Coodes Solicitors’ Corporate and Commercial team, highlights some considerations arising as a result of Covid-19 for anyone buying or selling a business.
In the early days of the pandemic, business transactions all but ground to a halt. In recent weeks, however, the deals market has picked up again and we are now advising a number of clients on buying or selling their businesses.
Covid-19 has created some potential issues for business transactions. Buyers and sellers need to be aware of these and ensure they get the best professional advice in light of these new risks.
1. Are you reliant on the sale being a transfer of a going concern?
Parties to transactions involving VAT-registered businesses will often seek to ensure that the transfer is classed as a transfer of a going concern. This is to ensure that no VAT is payable in addition to the purchase price.
Put simply, a transfer of a going concern is when a business and its assets are being sold and the business will continue to operate in a similar way under the new owner. VAT will not be added to the purchase price in a transaction for a business that is sold as a going concern, subject to various conditions being met.
As a result of the pandemic, a number of business have closed temporarily and this has led to some confusion over whether or not a sale can be classed as a transfer of a going concern. The impact of Covid-19 means that the transfer of a business, which would, in normal circumstances, be classed as going concern, could now potentially be subject to VAT.
If you are considering buying or selling a business, it is crucial to get tax advice from a suitably qualified professional to ascertain whether or not your transaction is a transfer of a going concern. That way you will know at an early stage, and ahead of negotiations, if you need to allow for an additional 20 percent on the price or whether this is something that needs to be negotiated in the sale agreement.
2. How do you value a business that has been impacted by Covid-19?
A business is valued on a number of factors, but a key consideration is its financial performance over the last 12 months. This is currently challenging for many businesses, particularly those that have had to temporarily close.
The question is further complicated by the issue of changes in the marketplace, with sectors such as hospitality and tourism being especially badly hit.
If you are planning to sell your business, get appropriate professional advice and allow extra time for valuations, as the process is likely to be more complex.
3. Protecting against clawback
Over the last few months, many businesses have been kept afloat by loans, grants and tax reliefs designed to support the economy during the crisis. The best known and most widely used is the Coronavirus Job Retention Scheme.
The Government has announced measures to claw back payments that should not have been claimed by businesses, whether fraudulently or in the case of genuine errors. This is likely to lead to penalties and even criminal prosecution in the most serious cases.
This introduces a new risk for anyone buying a business as the potential liability needs to be clearly established between the buyer and the seller. This is particularly important in a sale of shares.
We are treating this issue very carefully and are advising our clients to cover it in the agreement, one option being an indemnity. This then protects the buyer from any future liability payments and associated expenses.
Buying or selling a business can be a complex process in normal times. During the pandemic it is important to recognise the additional challenges and considerations and to seek professional advice at the earliest possible stage to avoid any potential pitfalls.