First published in Solicitors Journal
Pieter Van Rooyen and Matt Poli present a case study on a commercial transaction
Background
In September 2021, Beavis Morgan, the accountancy, tax and business advisory firm, was approached to assist on the sell side of a corporate transaction of a leading provider of IT infrastructure and cloud solutions technology.
The founder – a visionary entrepreneur who built up the business over almost two decades to be an award-winning service provider to blue-chip companies across the globe. The buyer – an equally impressive European technology company looking to expand and acquire the deep sector specialisms offered by our client.
The assignment
Beavis Morgan advised specifically on the commercial aspects, the tax elements of the warranties and covenants, as well as the accounting treatments and application of the management accounts and completion accounts.
The commercial side of the transaction had to be carefully navigated, due to the structure of the transaction pertaining to initial and deferred consideration, retention amounts, working capital definitions and calculations, as well as ongoing consultancy services.
Beavis Morgan also provided personal tax advice to the exiting founder with a focus on maximising returns from the business sale while ensuring complete compliance with tax authorities.
During an event like this an entrepreneur is afforded the chance to consider their future in a refreshing way. What that means for us is the ability to have conversations with our clients that reach beyond the typical boardroom agenda, engaging at the very core of why entrepreneurs start their businesses in the first place.
The transaction
While the deal structure was comparatively standard, several interesting legal and financial aspects came to light during the exploratory and due diligence phases of the transaction. These aspects covered both legal and financial matters – and gave us the opportunity to add value to our client beyond our initial brief.
In our analysis of the management accounts, it came as no surprise, especially considering the sector our client operates in, research and development (R&D) tax relief had been claimed over the previous financial years. When looking at the details of the R&D claims it quickly became apparent some material ‘qualifying expenditure’ had been overlooked in previous year’s claims. After gaining our client’s approval, we sought advice from the expert R&D tax relief team at Beavis Morgan, who undertook a desktop analysis which confirmed an enhanced claim may benefit our client – with the ability to go back two financial years. Prior to the competition of the same, we were able to re-submit the prior years’ enhanced R&D tax claim, achieving a net six-figure rebate, approved and paid by HMRC; something that certainly put a spring in our client’s step as he had not expected this to come from the sale of his company.
Challenges along the way
As is the nature of many M&A transactions, there were challenges we needed to address and overcome along the way. One specific challenge was the existence of a defined contribution SSAS (Small Self-Administered Scheme) set up as a retirement benefit for the Directors. Unsurprisingly, the buyer did not want the scheme to continue in its current form after the directors departed the business. From a series of negotiations, the buyers made it clear the potential liability of the defined contribution pension scheme needed to be dealt with to ensure completion of the transaction. We jointly dealt with the pension administrators and trustees to ultimately effect a Deed of Substitution of the sponsoring employer, a result that satisfied the buyer and our client.
Other more specific legal challenges that also had to be overcome to ensure completion for our client, were:
- Incomplete statutory registers needing to be reconstituted
- Historic share reorganisations having been undertaken incorrectly, leading to doubt over the beneficial owners of the shares in the company and, thus, the true identity of the seller
- Intellectual property thought to be the targets not being correctly vested in it
- Historic misunderstanding of particular licences required by the company to undertake its trade, leading to potential breaches if uncovered, and
- Historic payments on account of dividends being made to the sellers which needed to be regularised prior to closing.
The transaction finally completed in Quarter 1 of 2022 for a substantial seven-figure sum, leaving our client delighted with the result.
Going forward
Due to the deeper conversations with our client during the transaction, we are pleased to be working with him to establish his own family investment company to manage his affairs and family wealth going forward.
Our internal estate planning team is also engaged to ensure all matters of wills and trusts are considered to ensure protection and peace of mind.
Pieter Van Rooyen, is client partner at Beavis Morgan and specialises in supporting businesses through M&A and organic growth. Matt Poli is partner at Kennedys Law and specialises in corporate and commercial work: beavismorgan.com; kennedyslaw.com