Liquidating company during earn-out
Discussion
Not me, but a mate... I am also not an expert in these things!
A friend sold his company about 12 months ago - he has about £1m still to come to him in a couple of earn-out payments over the next 24 months.
The payments come to him as XYZ Ltd, (not the company he sold).
His accountant (more of a bookkeeper I think) has advised him to liquidate his company on the basis of higher tax rates coming down the pipe.
I wondered if the legal entity that is owed the money under the earn-out (XYZ Ltd) ceases to exist, whether that could cause an issue in terms of the debt owed by the acquirer effectively dissolving?
Am I on the wrong track thinking this way?
A friend sold his company about 12 months ago - he has about £1m still to come to him in a couple of earn-out payments over the next 24 months.
The payments come to him as XYZ Ltd, (not the company he sold).
His accountant (more of a bookkeeper I think) has advised him to liquidate his company on the basis of higher tax rates coming down the pipe.
I wondered if the legal entity that is owed the money under the earn-out (XYZ Ltd) ceases to exist, whether that could cause an issue in terms of the debt owed by the acquirer effectively dissolving?
Am I on the wrong track thinking this way?
lizardbrain said:
Sounds like he needs a proper accountant with experience of this scenario. My accountant is excellent but I wouldn’t ask her about something like this, let alone a Bookkeeper.
My thinking too and just what I've advised him.... but sometimes PH has an expert lurking. 
NDA said:
Not me, but a mate... I am also not an expert in these things!
A friend sold his company about 12 months ago - he has about £1m still to come to him in a couple of earn-out payments over the next 24 months.
The payments come to him as XYZ Ltd, (not the company he sold).
His accountant (more of a bookkeeper I think) has advised him to liquidate his company on the basis of higher tax rates coming down the pipe.
I wondered if the legal entity that is owed the money under the earn-out (XYZ Ltd) ceases to exist, whether that could cause an issue in terms of the debt owed by the acquirer effectively dissolving?
Am I on the wrong track thinking this way?
Did they not get proper advice before they sold? It's hard to advise as important info is missing. Firstly, was the trade sold or shares, and was it XYZ that sold either the shares or trade? Presumably XYZ was the holding company of the company sold?A friend sold his company about 12 months ago - he has about £1m still to come to him in a couple of earn-out payments over the next 24 months.
The payments come to him as XYZ Ltd, (not the company he sold).
His accountant (more of a bookkeeper I think) has advised him to liquidate his company on the basis of higher tax rates coming down the pipe.
I wondered if the legal entity that is owed the money under the earn-out (XYZ Ltd) ceases to exist, whether that could cause an issue in terms of the debt owed by the acquirer effectively dissolving?
Am I on the wrong track thinking this way?
MaxFromage said:
Did they not get proper advice before they sold? It's hard to advise as important info is missing. Firstly, was the trade sold or shares, and was it XYZ that sold either the shares or trade? Presumably XYZ was the holding company of the company sold?
XYZ Ltd had a valuable contract and it was, essentially, the rights to the contract that were sold. If you want to liquidate, you'll need to get the SPA amended first (if possible), plus you'll end up getting taxed assigning the earn-out elsewhere.
In all likelihood it'll be best to wait for the earn-out and then wind it up. It sounds like this would have been better as a share sale- 10%-20% tax vs 30%-45%.
In all likelihood it'll be best to wait for the earn-out and then wind it up. It sounds like this would have been better as a share sale- 10%-20% tax vs 30%-45%.
Sounds like he's had value from two transactions. A share sale of the Company and recurring income from the contract into XYZ?
Presume the structure was to protect the deferred or earn out consideration, not a bad idea, but now caused an issue.
Is he now considering an MVL of XYZ and worried about the forward revenue? His 1st issue will be whether the contract is terminated on insolvency (common but an MVL carve out isn't unheard of but more commonly only allowed as part of a solvent restructuring).
2nd issue is whether he can novate the contract to himself as a part of the MVL.
Can't help on the tax aspect, sorry. Alpinestars is your man.
I think he needs decent advise from an insol professional who specialises in MVLs and a contract lawyer, but I am making some assumptions in the info gaps so may have misunderstood the full situation.
NDA I'm doing this on a phone so may not have picked up on all the points made or already answered
Presume the structure was to protect the deferred or earn out consideration, not a bad idea, but now caused an issue.
Is he now considering an MVL of XYZ and worried about the forward revenue? His 1st issue will be whether the contract is terminated on insolvency (common but an MVL carve out isn't unheard of but more commonly only allowed as part of a solvent restructuring).
2nd issue is whether he can novate the contract to himself as a part of the MVL.
Can't help on the tax aspect, sorry. Alpinestars is your man.
I think he needs decent advise from an insol professional who specialises in MVLs and a contract lawyer, but I am making some assumptions in the info gaps so may have misunderstood the full situation.
NDA I'm doing this on a phone so may not have picked up on all the points made or already answered
Edited by sleepezy on Saturday 24th December 21:42
@sleepezy 
It sounds like an asset disposal by XYZ?
OP, did XYZ recognise the contingent deferred income in its accounts?
Can the contract be assigned from XYZ to your mate? This is probably the key point.
Is your mate the sole shareholder of XYZ?
There could be differing tax results depending on the above, and depending on whether business asset disposal relief is available.
It sounds like an asset disposal by XYZ?
OP, did XYZ recognise the contingent deferred income in its accounts?
Can the contract be assigned from XYZ to your mate? This is probably the key point.
Is your mate the sole shareholder of XYZ?
There could be differing tax results depending on the above, and depending on whether business asset disposal relief is available.
Alpinestars said:
@sleepezy
It sounds like an asset disposal by XYZ?
OP, did XYZ recognise the contingent deferred income in its accounts?
I'd imagine it was a single asset disposal and the deferred income wasn't considered. Now really is the time to get a good accountant/tax advisor/solicitor involved to consider what options are available. Shutting down a company because of impending tax increases could be very poor advice. What do they want to achieve with the funds? Could this be the opportunity to pivot to a family company etc etc. A huge number of variables.It sounds like an asset disposal by XYZ?
OP, did XYZ recognise the contingent deferred income in its accounts?
MaxFromage said:
Alpinestars said:
@sleepezy
It sounds like an asset disposal by XYZ?
OP, did XYZ recognise the contingent deferred income in its accounts?
I'd imagine it was a single asset disposal and the deferred income wasn't considered. Now really is the time to get a good accountant/tax advisor/solicitor involved to consider what options are available. Shutting down a company because of impending tax increases could be very poor advice. What do they want to achieve with the funds? Could this be the opportunity to pivot to a family company etc etc. A huge number of variables.It sounds like an asset disposal by XYZ?
OP, did XYZ recognise the contingent deferred income in its accounts?
The “plain vanilla” result if the company continues to own the asset, is that the consideration is taxed in the company, possibly at 25%, and a subsequent mvl of the company would be a capital distribution to the shareholder, subject to CGT, possibly with business asset disposal relief.
If the contract can be assigned to the shareholder, and it’s done now, I suspect HMRC would insist on the chose in action being valued and taxed in the company, and the assignment possibly being an income distribution. A bad answer.
The best answer would be no CT in the company and a capital distribution to the shareholder. But it’s a gamble.
The first question of course is whether the contract can be assigned.
Alpinestars said:
I’d agree with most of that. However, the asset should have been valued and taxed when it was disposed, including any ascertainable/unascertainable future consideration. It may be that if the future consideration was unascertainable, it would result in 2 different disposals.
Agreed. Unfortunately when I come across someone with these issues, 9 times out of 10, the income that should have been valued and taxed on disposal, has essentially been treated as trading income as and when. Fingers crossed the issue is just assignment of the future rights.Gassing Station | Business | Top of Page | What's New | My Stuff