What Founders Should Ask About Tax Before Signing a Sale Agreement

A buyer offers £4 million for a company. The founder reads that figure as the price, then learns that part will be paid in the buyer’s shares, part will depend on results over the next two years and part will be retained against possible claims. She has also agreed to work with the buyer after closing. The offer now needs to be broken into its separate elements before her accountant can estimate what she will receive and what she needs to reserve.

Ask for that analysis while the terms can still be changed. The difference between two offers may sit in the timing and tax treatment of the money, alongside the commercial risk of whether it will ever be paid. Give advisers the latest draft, the business’s ownership history and any relevant moving plans. If a term changes, ask which conclusion needs checking again.

Confirm exactly who is selling what

Start with the legal seller. If you sell shares that you own personally, the proceeds go to you subject to the deal terms and tax. If the company sells its business assets, the company is the seller and there may be further questions about how its owners receive any money later. Some deals involve more than one seller or more than one entity. Draw the structure with the proposed buyer and record which person or company receives each part of the price.

Bring details of share classes, any options or employee interests and past transfers or reorganisations. The headline ownership percentage can conceal different economic or voting rights. Ask which people are expected to sell, what portion each will retain and whether any proposed reorganisation is needed before closing. Get an explanation of the costs and approvals before treating a reorganisation as a routine preliminary step.

Find the disposal date in the contract

Signing, completion and payment can fall on different days. HMRC’s manual explains that for UK Capital Gains Tax a disposal under an unconditional contract generally uses the date the contract is made. For a conditional contract, it generally uses the date the conditions are satisfied, subject to the relevant rules. Ask your legal and tax advisers which conditions matter and whether any special rules or exceptions apply to the transaction. Record the date on which they expect the tax result to be calculated.

If you are moving, give the advisers your residence and work timeline as well as the deal timeline. Ask about a later completion, a delay in satisfying conditions and a change to the payment schedule. A price can remain the same while a different event falls in a different tax year or period of residence. An adviser can only review the sequence you give them.

Split the consideration into amounts with different risks

• Cash at completion. Check whether the agreement adjusts the cash price for debt, cash balances, working capital or other amounts. Identify which adviser will verify the final figure.
• Deferred amounts and earn-outs. Separate an agreed sum paid later from amounts whose value depends on future performance or other conditions. Ask how each is valued and when any gain or income must be reported. Include a scenario in which an amount is delayed or never received.
• Shares or securities from the buyer. Ask how those assets are valued, whether any special reorganisation treatment applies and when you could sell them. HMRC’s guidance distinguishes between different combinations of shares and cash.
• Payments for continuing work. Ask the lawyer to identify how salary, consultancy fees or incentive arrangements relate to the purchase terms. Give the tax adviser the employment or consulting contract alongside the sale agreement.

Compare the time at which an amount becomes taxable with the time when you can actually use it. A sum in escrow or locked up in the buyer’s shares may form part of the deal’s value while doing little to pay the first tax bill. Ask for a schedule showing expected cash at each stage, the possible tax and filing dates and the minimum cash you would need if some of the terms take longer than planned.

For example, suppose two offers both show £4 million. One pays £3 million at completion and £1 million a year later. The other pays £2 million immediately, gives £1 million of buyer shares and offers a further £1 million if targets are met. Put both offers on the same calendar. Ask the adviser to identify which amounts would need valuing, what tax might be due before the first later payment and how a missed target would affect the calculation. Then add professional costs and any payment due to another person. The revised comparison should show cash available at each stage and distinguish amounts supported by a firm obligation from amounts that depend on another event.

Check the evidence for any relief

If you expect to claim Business Asset Disposal Relief, ask the adviser to review eligibility against the current rules for the type of disposal. The conditions can depend on the business, the seller’s relationship with it, the shares and the qualifying period. Previous claims can affect how much relief remains. Give the adviser your ownership and work history, as well as records of any changes in share rights or company activity. Ask which documents should be retained to support the calculation.

If a condition is uncertain, compare a calculation that assumes relief with one that does not. Include any other assumptions that make a significant difference, such as the amount treated as fixed consideration, the value of the buyer’s shares and a date near the end of a tax year. This gives you a realistic range to use in the negotiations. It also helps you identify a clause or missing document that is worth resolving before signing.

Bring four answers back to the negotiation

1. Who receives what? Confirm the seller, the buyer, each recipient and the amount or right they receive. Ask who will reconcile the final settlement statement.
2. When does the tax arise? Record the relevant disposal and payment dates, including what could change them. Ask which years and jurisdictions need filings.
3. How much cash should you reserve? Model the taxes and costs alongside the actual receipt schedule. Decide what to set aside before spending or investing proceeds.
4. Which terms need another review? Ask your advisers to flag revisions that affect the answer. If the buyer changes consideration or requests a longer period of employment, send the new wording before approving it.

Ask for the tax advice in writing and save the version of the sale agreement it refers to. Keep a separate note of any unanswered questions, who is resolving them and by when. That way, if the buyer sends a revised term sheet at short notice, you can compare it with what was modelled and identify which changes need specialist attention before you agree.

A founder should be able to explain the sale as a set of dated receipts and obligations. When that record shows how much is available at completion, what is uncertain and when tax may be payable, the offer is easier to compare with the alternatives. It is also a better basis for deciding when you can commit to a move or a major purchase after the sale.