Posted in: Legal
Selling a Limited Company or business in Spain involves much more than agreeing a price and signing a contract. Before marketing the business, the owner needs to decide what is actually being sold, prepare the financial and legal information, and structure the transaction carefully.
At Molina Solicitors, we have assisted with sales of businesses and Spanish limited companies, including companies with property assets, employees, leases, licences and existing debts. Every sale is different, so early legal, accounting and tax advice is important.
The first decision is whether the owner intends to sell:
The shares in the Spanish limited company, known as an S.L.;
The business or trading activity operated by the company;
Selected assets, clients, contracts or goodwill; OR
A combination of these.
This distinction is essential because the legal, tax and practical consequences can be very different.
A share sale means that the buyer acquires ownership of the company itself. The company generally continues to own its assets, operate its business and remain responsible for its existing obligations. The buyer may therefore acquire:
This is sometimes attractive where the company has a long trading history, established banking relationships, credit facilities, licences or valuable contracts. A buyer may prefer to acquire an established company rather than start a new one. They are buying a “brand”. Also, especially if the name of the business has been patented. However, a buyer will normally require extensive due diligence before agreeing to proceed.
An asset or business sale involves transferring the trading activity, or selected parts of it, rather than selling the company’s shares.
The sale may include:
The original company may retain its cash, property, debts and other assets. It may then be closed, kept dormant or used for another purpose, depending on the owner’s circumstances.
Selling a business of assets can be suitable where the company has a complicated structure, or owns property. Also, if it has debts or contains assets that the buyer does not want to acquire or the seller does not want to sell. However, don’t assume that a business/ asset sale automatically transfers no liabilities. Certain liabilities, particularly employment, tax, and contractual liabilities, may follow the business or activity.
The Spanish Tax Agency confirms that a transfer of an entire business may be outside the scope of VAT, but a transfer of individual assets or a business may be treated differently. The VAT position must therefore be reviewed transaction by transaction.
The choice between a share sale (company) and an asset sale (business) affects the liabilities acquired by the buyer; the assets retained by the seller; employees and employment obligations; contracts and licences. Also tax treatment and VAT (IVA); Notarial and registration requirements; the future use of the company name; and the whole sale agreement.
A buyer may want the established S.L. because it has a long trading record, existing credit arrangements or a good reputation with suppliers and banks. Another buyer may only want the trading activity and may prefer to avoid acquiring the company’s historic liabilities.
The correct structure depends on the business, the buyer’s objectives, the company’s financial position and the tax advice obtained.
A prospective buyer will usually expect a clear financial picture of the business. The seller should contact the company’s accountant and obtain and put together (for them at this stage only):
The seller should also prepare details of:
The more complete and organised this information is, the easier it will be for the lawyer to advise on whether the sale should involve the S.L. itself, the business activity, or selected assets. Furthermore, it will also give a potential buyer greater confidence that there are no unexpected debts, obligations or problems, when selected information is shown (CARE: not all and none without advice from the advising lawyer).
A formal audit is not automatically required for every sale, but an independent accountant’s review or financial due diligence can give the buyer greater confidence and may help justify the proposed price. It is a decision to be made if considered worth the expense and more than one quote should be obtained.
The buyer will usually investigate the company and business before signing. This process is known as due diligence. The review may cover much of the above information obtained but should be selected carefully and not freely offered. Certainly not without a document being signed regarding confidentiality. A lawyer should be involved from the beginning.
The seller should not assume that a contract, lease or licence can be transferred automatically. Some require the landlord’s, supplier’s, customer’s or authority’s consent.
If the buyer purchases the S.L., they are not simply buying the profitable side of the company. They are buying the good and the bad. They are also acquiring the company with its history, obligations and potential liabilities. This is why the accounts’ and company information must be fully examined and acceptable to the buyer. A buyer may request a detailed financial and legal review before proceeding
Employees are one of the most important issues in a business sale and this issue needs handling carefully and with a lawyer’s advice. Mistakes can be costly. The seller should prepare a schedule showing:
Where the business continues as an identifiable economic activity, Spanish employment law may treat the transaction as a business succession. In that situation, the buyer may be required to take over existing employment contracts and associated rights and obligations. The parties cannot necessarily avoid those obligations simply by describing the transaction as an asset sale.
Social Security
If redundancies are contemplated, they must be handled carefully. Moreover, the cost may depend on the employee’s salary, length of service, reason for termination and applicable employment rules.
The buyer and seller should agree as part of the negotiations who is responsible for:
These arrangements should be recorded clearly in the sale agreement.
A business may have considerable value in its commercial relationships. These can include:
The seller should prepare a list of all important contracts and identify whether each contract can be assigned to the buyer.
A buyer may also want the seller to obtain written confirmation from key customers or suppliers that the relationship will continue after completion.
If the S.L. is sold and continues trading under the same name, the seller should consider the effect on their existing reputation. If the new owners later operate the company poorly, fail to pay suppliers or provide poor service, the historic name may still be associated with the previous owners locally.
The sale agreement should therefore deal with:
This is particularly important where the seller has built a personal reputation over many years.
The buyer may ask the former owner or key employees to remain involved for an agreed period. A common arrangement might involve a short handover period, but the appropriate period depends entirely on the business.
The most difficult commercial question is often the price.
There is no single valuation method that applies to every business. The price may be influenced by: net profit; turnover; cash flow; assets; property; goodwill; recurring income; customer retention; employees; contracts; debts; market conditions; competition; the buyer’s strategic reasons for purchasing; and the owner’s valuation.
Some owners establish an asking price based on their own knowledge, financial needs and experience. This can be a useful starting point, but it should be tested against the financial evidence and local market.
A professional valuer can examine everything. A valuation report can help the seller understand the likely range of value and provide a credible basis for negotiations. It does not, however, guarantee that a buyer will pay that amount and can be expensive. Some people use annual net profit multiplied by 10 for deciding a value, but other issues need taking into account.
Obtaining quotes for valuations and weighing up the benefits against cost needs consideration.
Tax advice should be obtained before agreeing the structure or price. In some circumstances, selling the shares in the S.L. may have different tax consequences from selling the business or individual assets. The seller should therefore obtain advice from their accountant before deciding how the transaction should be structured. The tax result will depend on the seller, the company, the assets involved and the precise form of the sale.
A properly structured transfer may benefit from particular tax treatment, and a transfer of an autonomous economic unit may be outside the scope of VAT, but the seller must still consider any gain, profit or other tax consequence.
The accountant should calculate the estimated net proceeds after tax before the seller commits to a price.
Publicly advertising that a business is for sale may concern employees, customers, suppliers and competitors. Confidentiality is therefore very important.
Potential buyers may be identified through the seller’s professional contacts and existing suppliers and specialist business-transfer networks.
The seller should normally require a prospective buyer to sign a confidentiality agreement before receiving sensitive information.
Information should be released in stages after consulting a lawyer. For example:
The seller should avoid disclosing customer identities, commercially sensitive pricing or confidential contracts before there is a genuine and properly controlled transaction.
Before the final contract, the parties may sign a document of terms setting out the main commercial points.
A seller should not sign a sale agreement without understanding the warranties and indemnities being given. These provisions can create substantial liability after completion.
Completion may involve:
Where there is a change in the ownership or activity of a business, the relevant Social Security and business-registration formalities must also be considered.
A successful business sale depends on preparation, confidentiality and choosing the correct transaction structure. Also the seller working with the lawyer and accountant as a team. The seller needs to understand what the buyer is acquiring, what liabilities may remain, how employees and contracts will be dealt with, what tax may arise and how the price has been calculated.
At Molina Solicitors, we can assist with the legal aspects of selling a Spanish business or S.L., including reviewing the proposed structure, preparing or negotiating the sale documentation, carrying out legal due diligence and coordinating with the seller’s accountant and tax advisers.
We should be contacted once a decision has been made to sell and some of the above information has been put together, but if there is a potential buyer before any documentation is provided or agreements made.