Creating the blueprint
We all might have our own blueprint, our own successful formula for creating wealth. For me this is to be buying companies or at the least the intellectual property and customer base. The blueprint that I am putting together can be used in any business, within reason. It’s the mechanics of buying a business in a legal framework that is tax efficient.
The meeting with the solicitor, accountant and corporate finance advisor was a lengthy process yesterday. We did get stuck on some key legal issues. My opinion is you need to take a pragmatic approach and think about the commercial situation at times and step away from what a contact states. What is the big picture, what are we looking to achieve, will other parties think it is fair?
I assumed that the best course of action was to buy the company, the main benefit being to the person who sells is that if they own over 5% of the shares and have been a working director, they are eligible Entrepreneurs Relief, a 10% tax position up to £1m in a lifetime. However, any goodwill we acquire does not give rise to any tax breaks our end, be it this intangible asset will be depreciated over time.
So what does this mean? Whereas I was expecting the brief (solicitor) to produce an SPA (sale and purchase agreement), he was talking about a business sale agreement. Here we buy the business of the company, not the company. My long standing accountant of 18 years told me the seller receives the sale income into the company and his company has to pay corporation tax. We on the other hand depreciate the investment over its life and receive full tax relief on it. It sounded too good to be true from our perspective.
So how will we fund this? We can devise a contract with the seller where we pay them over time as and when we receive income from the business. In effect it is a loan note where repayments are deferred. The accountant was at pains to say this has to be worded correctly and clearly there are restrictions to how it works, but in effect, we can start to acquire companies with little cash up front in a tax efficient way that will stand up to the scrutiny of HMRC.
May be this diary will not last three years….
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