Selling your company is a big decision. One of the key decisions you need to make is the method of selling because it will affect matters such as your taxation and other practicalities.
You can sell a limited liability company either through a sale of shares or a sale of business.
Differences between a sale of shares and a sale of business
The key difference is the party selling the company.
In a sale of shares, the company’s shareholders sell the shares entitling ownership of the company to the buyer. The shareholders get the sales price themselves. Through the transaction, all the rights and responsibilities attached to the ownership of shares, such as debts and liabilities, are transferred to the buyer.
The sale of shares of a limited liability company doesn’t in itself affect the company’s operations, but it’s possible that the new owners want to develop the company’s operations and make changes.
In a sale of business, the company sells its business to the buyer, either in part or in full, and the buyer pays the acquisition price to the seller company. As part of the transaction, the company’s customer and contractual relationships are often transferred to the buyer.
However, debts and liabilities are not transferred but remain with the seller. Neither does a business transfer affect the ownership of shares of the seller company.
Impact of a sale of shares and a sale of business on taxation
The sale of shares has no tax consequences for the company. Instead, the shareholder selling the shares will become liable to pay tax. The buyer, on their part, will have to pay the transfer tax.
The seller may deduct the acquisition cost of shares from the sales price. The difference is considered a sales profit, i.e. a capital gain, on the basis of which the tax on sales profit is determined. The capital gain is taxed as capital income. The tax rate on capital income is 30% up to 30,000 euros and 34% for the part exceeding that amount.
If the seller of shares is a limited liability company, the tax treatment depends on whether the share transaction is subject to tax under the Business Income Tax Act or the Income Tax Act.
In the sale of business, the seller is the company. Therefore, the sales price is considered income for the seller company, which has to pay a 20% tax based on the corporate tax rate. However, the seller company may deduct the unamortised purchase price from the sales price in income taxation. The difference is considered as income.
From the shareholder’s viewpoint, a business transfer is subject to double taxation: the company pays tax in connection with the sale of the company, and the shareholders pay tax when they draw down funds gained from the business transfer in the form of salary or dividend.
Which option should you choose?
Each sale of a company and the choices it involves are unique.
Several aspects need to be considered when choosing the method of sale. The key aspects include, among other things, the sales price, the terms of sale, taxation, the need for funds and the seller’s future plans.
Several companies in Finland specialise in corporate sales and acquisitions. OP helps you in planning an acquisition and the related financing.
FAQs
If you're considering selling your small business, consider these seven steps to stay on the offensive.
- Determine the value of your company. ...
- Clean up your small business financials. ...
- Prepare your exit strategy in advance. ...
- Boost your sales. ...
- Find a business broker. ...
- Pre-qualify your buyers. ...
- Get business contracts in order.
Your company usually has the right of first refusal, which means it can buy back your stock before other investors do. The first step to selling your shares is asking your CFO or founder if they are planning to run a buyback or third-party tender offer. If they do run such a program, they will set rules.
Should I sell my business or the stock? ›
If the business in question has a large number of copyrights or patents or if it has significant government or corporate contracts that are difficult to assign, a stock sale may be the better option because the corporation, not the owner, retains ownership.
What does it mean for a company to sell its shares? ›
Selling shares in a company is a critical decision that can have profound implications for the business and its shareholders. The process involves offering ownership stakes in the company to investors in exchange for capital infusion.
What is the quickest way to value a company? ›
Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company's share price by its total number of shares outstanding.
How do I value my company to sell? ›
1. Book value of your business (asset value) Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping.
How do you cash out shares in a company? ›
Investors can cash out stocks by selling them on a stock exchange through a broker. Stocks are relatively liquid assets, meaning they can be converted into cash quickly, especially compared to investments like real estate or jewelry.
What documents are required to sell shares? ›
Company Share Sale Document Templates
- Finder's Fee Agreement (Sale of Shares)
- Finder's Fee Agreement (Purchase of Shares)
- Board Minutes - Approval Of Acquisition.
- Stock Transfer Form (Form J30 Fully Paid Shares)
- Advisor Terms Of Engagement.
- Confidentiality Agreement (Share Or Asset Sale)
Methods for valuing private companies could include valuation ratios, discounted cash flow (DCF) analysis, or internal rate of return (IRR). The most common method for valuing a private company is comparable company analysis, which compares the valuation ratios of the private company to a comparable public company.
Should I sell or keep my company stock? ›
The Bottom Line. It's common for employees to hold oversized positions of company stock in their portfolios, but this is almost always not the ideal allocation for maximum risk-adjusted returns. The best option to diversify is to immediately sell the company stock and reallocate it across your portfolio.
Disadvantages of share capital
Reduced control. Selling shares in a company is effectively akin to selling off tiny pieces of its ownership and control. Shareholders are entitled to a say in how the business is run and even who is running it. Hostile takeover.
What should I do with my company shares? ›
Selling shares in a business can generate significant cash, which can be used to pay down debts or fund investments or charitable donations. Likewise, selling part of a business can reduce the owner's risk and allow them to diversify their personal assets.
Why would an owner of a business sell shares of his company? ›
The main reason why most companies sell shares of stock is to raise money for the company. For a certain sum, an investor can buy stock in the company, thus granting them ownership rights in it. With this, investors can participate in the company's growth and profit.
What is the difference between the sale of shares and the sale of business? ›
When purchasing a business, the buyer is acquiring the assets of the business, including its goodwill, contracts, equipment, and inventory. The sale of a business is a more complex transaction than the sale of shares, as it involves the transfer of multiple assets and liabilities.
Who pays when you sell shares? ›
When you sell your stocks the buyer pays the money; when you buy the stocks the money you paid goes to the seller. The transactions are handled by stock brokers.
How much should you sell your company for? ›
Generally speaking, business values will range somewhere between one to five times their annual cash flow. When you estimate your earnings multiplier, you can assess your business in several key areas that impact the future, such as profit trends and revenue. This also factors in customer base and industry position.
What is the best site to sell your business? ›
Empire Flippers is an Inc. 5000 company and the #1 curated marketplace to buy and sell an online business.
What is the most tax efficient way to sell a business? ›
Installment sale.
To lessen the impact of capital gain or income tax obligations in a single year, you may want to negotiate a sale where proceeds are received over more than one tax year (i.e., an installment sale).
How hard is it to sell a company? ›
Selling a business can be a very complex process. It takes time and hard work to successfully sell a business. No matter the reason you're looking to sell, the goal is often the same: To sell your business as quickly as possible for as much money as possible.
