Selling a British company to a US entity is complicated to say the least. From this experience, we have learned that it is doable and an eye-opening experience from both the seller and the buyer side. There are opportunities out there, and with some perseverance, great returns on both ends of the deal.
Today’s guest, Joseph Harwood, a London based entrepreneur, was behind one of the most complex transactions we’ve dealt with in twelve years of brokering. Despite the challenges of selling an overseas company, we managed to help create an advantageous deal structure for both the buyer and the seller.
Episode Highlights:
- What the tax situation looks like for a UK seller looking to sell to a buyer in another country.
- Types of transaction structures available to these sellers.
- The number one objection coming from the buyer side.
- How Joseph was able to see through the obstacles.
- What the process was like from the outset.
- The advantages of listing with an earnout.
- If and when doubt crept in for Joseph.
- The seller tax break on built-up cash flow on a transaction like this.
- Why this approach means that buyers have choices and a comfortable pace.
- Things that a UK based seller should consider for selling abroad.
Transcription:
Joe: Mark one of the great things about Quiet Light and the team that we have is we're always communicating in the background; helping each other out, asking questions, sharing information. And more recently we're seeing a lot of communication about the sale of UK based or European based Amazon seller accounts and the transfer of i. And I understand that you just took one on. I did a few years ago. Actually, there's usually a small component of most transactions that I do if it's FBA that there's a European run that 100% German seller account last year. We're always doing them and they're always different. Our buyers get a little bit concerned about buying one. And our sellers get a little bit concerned about the transferability of one. But you just took on a very complicated one. You’ve managed to do the transfer. It ended up being a stock sale and there was some definitive advantages to both the buyer and the seller in making this happen. Can you tell us a little bit about what this podcast is about and how you talked about the owner of the business there?
Mark: Yeah. So the owner of the business is Joseph Harwood. He agreed to come on very graciously. I'm super happy he came on because in 12 years of selling online businesses this was easily the most complex transaction I've done. There was a moment where we had a sell-side conference call only; so only the advisors on the sell-side and I was the last person to join and the prompt at the beginning of the call said you are the 12th caller on this call. And I'm thinking 12 people on this call on the sell-side only to advise this transaction. Now you may be hearing the something and that's why I don't do a UK deal because it's complex. But here's the thing, throughout this process not only did we take what was a fairly complex business in terms of its operations we took a UK company which has some tax disadvantages being sold in the US and we managed to make a structure that worked out well for the buyer and worked out well for the seller. In fact, there are structures available which can be tax advantageous for both the significant degree. And our buyer in this case; God bless him, a great person, a great buyer, had the perfect mindset for this which was to not try and adjust this large transaction all at once. And everybody in the team did the same thing by the way just to address each problem step by step and the result of this is that he got a great deal and a great company that is growing like absolute bonkers that not a lot of people were looking at. And for him to look here and not rule this out based off the UK domicile only is a testament to him and I think will pay off pretty handsomely for him. On the UK side I know we talked to a lot of UK sellers that think that they can't sell a business and listen it's more difficult. We're not going to cast aspersions here and say that it's somehow easy to do. A lot of people do avoid UK based businesses but it is possible. It needs be structured right. We need to attack it correctly. And for those of you out there looking to buy if you can figure out this UK angle and it is something that can be figured out. We do have a template for it. It's a really good opportunity because there's some great businesses out there that aren't going to market right now for the very reason that those sellers don't think they can.
Joe: I would say it's almost the unavoidable future, right? A long time ago we talked about can you even sell an Amazon-based business. Well, here we are millions and millions and millions of them sold. Now it's those businesses all have; a lot of them have a UK component to them and some are standalone UK businesses or really European businesses. It could be any country over there. So I think it's the future. I think it's important for both buyers and sellers to understand it. And I'm really excited to listen to this one myself and hear your most complicated transaction in 12 years come to a final close and successful transaction for both the buyer and seller.
Mark: Alright Joseph thank you so much for agreeing to come on the podcast. For those of you who didn't pick us up in the intro and I'm sure Joe and I talked about this but Joseph you and I recently worked together along with Scott Dietz from Northbound to help sell your business. And I'm really happy to have you on because we love bringing on previous clients.
Joseph: Yeah, glad to be here Mark and hopefully, I can still shine some light on a possible sale of UK Limited Companies to US buyers.
Mark: Yeah and that's one of the things that I definitely want to talk about on this and just have a conversation with you. I know within Quiet Light Brokerage we have this conversation quite a bit and then I would imagine among UK sellers, it's probably met with some skepticism; the idea that you could even sell a UK business, e-commerce business primarily because of the tax situation. Could you just go over that for somebody who might not be familiar with what does a tax situation look like for UK seller who's considering selling their business?
Joseph: Yeah so basically the big fear is doing an asset deal and then having to take your funds as income which is then transferred into a person's assets which is taxed heavily. If you get over; run about 100k threshold that's about 45% so doing an asset deal is technically really, really bad for you. So generally most sellers want to do a seller shares deal and then you get a 10% tax co entrepreneurs relief which is taxed personally up to; you have an allowance of 10 million in that and that's a 10% tax. So it's a pretty significant difference tax-wise depending on what kind of deal you can get.
Mark: Yeah and I think buyers or sellers tend to be skeptical that they can do this. And this isn't just with the UK. I know Canada has something very similar. Australia has a similar structure as well where a share sale you get a pretty awesome tax rate. And then if you're doing an asset sale you're going to get absolutely killed with the tax rate. The buyers don't generally want to do a stock sale and brokers like myself I know when you and Scott first approached me I think that was one of the first things I told you. Like wow, I don't know about a stock deal. I can't offer something as a stock deal that's rule number one. And rule number two a buyer is looking at it; I don't know what would you guess would be the number one objection for buyers? I would say probably the liability carrying forward.
Joseph: I think structuring wise it's complex because you're buying an entity and you’re in a different country. So I think that in itself can scare a few people. It's a bit more of a learning curve.
Mark: How many; let's count how many advisors we had on your team. So just on the sell-side, we had Scott Dietz, myself.
Joseph: Yeah we'd retained Redpath US tax advisors who had retained a UK council.
Mark: Oh so we have a UK council as well.
Joseph: Well yeah they had a UK council retained within them. So that was kind of tax advice UK, US. And then we had a UK contract advisor and then our US contract advisor. So technically 4 different retentions of legal advice which ended up in quite a hefty bill I think it's a good learning process for the book.
Mark: The thing is you can absorb that hefty bill. We're not going to discuss how much you sold your business for. I mean it was in the seven figures range. It was a good size. When you're talking about the difference between a 45% tax paying for advisors I mean it's worth it. But it did get complex in that there was just a lot of voices that were being heard with every single document that got shared. And I was just on the sell-side. We had Rochelle Locke who's been on our podcast advising the buy-side and they had their own people as well that were advising on the tax structure and everything else. There was a lot of advisors there so it was a bit more complex but I think part of that was because we hadn't done this before.
Joseph: Yeah I mean I'm going to say it was a big learning curve for everyone involved. We were lucky to have a patient buyer who was determined to see the deal through to the end. And I think we from my experience have learned a lot about selling a UK company to a US entity. Yeah, it's a complicated process but looking back at it now the tax piece of the puzzle is; I mean okay every situation business is unique but there will be no way we would need to have as many detailed conversations because we're kind of aware of what issues can crop up tax-wise the permanent establishment thing and where the business is run from and those kind of things are more solvable. Now we're sort of prepared and then contract wise like I don't actually think we needed to retain a UK council until the buy-side presented documentation for it. And then we would have had the UK council review; the UK law side documents but I think Sean from E-commerce Small group would have been fine for just reviewing the actual SBA agreement. Yeah like it could have been simplified down but it was still in itself like a valuable process to learn. And there was so many great things about the tax side that sort of gleaned from that process. I think it was worth it.
Mark: Yeah. I want to get into that in a little bit because one of the eye-opening things with your transaction was the number of tax advantages that you personally had as a seller and also the tax advantages that we were able to potentially introduce into the buy-side of the equation. And for those that are listening that are looking for acquisitions, there's actually an opportunity here which we basically uncovered to look at UK based businesses and save significant money in a number of ways. Before we get into I want to back up a little bit and just talk about what it was like when you first came on with Quiet Light Brokerage. Because I remember when Scott who you hired a while ago to help advise and again Scott's a great guy. He’s super good at advising. He caught me at a conference in Austin and said hey Mark I got this great business for you. And then he went into a little bit of what it was and like I don't know Scott I don't know about the future. And then he said well we really believe this is going to be good and there's all sorts of reasons that we think; I mean not think but we know this business is going to grow by this much. And by the way, it’s a UK company and I'm just thinking Scott come on.
Joseph: Every step of the conversation it gets a little bit harder doesn't it?
Mark: Right. And so the first time that I talked to you Scott and I were also at a conference and so I got up early; I think I was in Las Vegas, my whole mindset was okay I've got to get this guy's expectations set early on. I will take this on but this is going to be really, really difficult to do. And I'm glad though that you saw through all that because it did turn out to be a really eye-opening sort of exercise. But what was that initial upfront process like? I know you listed a business before for sale. What was it like going through that process with Quiet Light?
Joseph: It was great. The first brokerage that I've worked with has gone to so much detail to answer so many potential objections from a buyer. I mean I'm surprised we got any no's after that the depth on our information pack and the seller interview. I mean the length you guys went to take to understand potential objections and understand the business as well; the risks involved and kind of highlighting it, picking up on the upsides, and really like understanding what I was doing with my company and the niche I'm in. I think that was a huge part of getting a buyer to the table who was ready to take on the risk that was over there. It’s a Q4 niche. It's a very risky prospect. And I think the buyer saw the risk and the upside and was able to make an educated decision because of the information that had been put together. I'm not going to lie, it got to the point where it was slightly frustrating and we were having our firstborn son at the time. We intended to be listed and sold before that happened. We ended up a bit further behind than we actually wanted it to be. But in the end, it was right so we got a deal done. So that’s all that really matters.
Mark: Yeah and the good news is we beat your son crawling, right? He's not crawling yet.
Joseph: Yeah exactly.
Mark: Okay, so we got the business sold before he was crawling.
Joseph: We got that.
Mark: That upfront process was difficult but the lesson that I took away from that portion; your business was unique in a lot of ways like you said it was a fourth-quarter sort of product. And look a lot of Amazon products a lot of Amazon businesses are fourth quarter heavy but yours really relied on that fourth-quarter more so. And just to put this in context for people listening, the growth trajectory that we were seeing on your business was really, really significant. And some of the things we are anticipating we're pretty aggressive. And so that all came in this sort of short period and so there is this element of perceived risk. So the lesson I took away from this that was so good and again Scott did a great job with this was figuring out a structure that got you, Joseph, a good amount of money at close where it wasn't going to be a complete miss if things fell apart but also allowed you to ride some risk with the buyer and let them really cash in on the upside of that without risking all of the money on it. And so deal structuring to answer objections I think is really if I could summarize it.
Joseph: Yeah. I really totally agree. And I think of brokerage firms just have this kind of cookie-cutter response to how they want a less to do it; it’s 3x, it’s 4x because of blah, blah, and blah. We listed with an earn-out and I think that one pulled a high multiple but two I think you already reassured buyer that we believed our projections and they weren't just pulled out of thin air and to kind of like; you know like we were really willing to go on that journey with you. And I think yeah that really helped.
Mark: Yeah, I think so too. And a lot of people in your shoes don't want to do an earn-out because especially when it's first proposed you think I don't know who's going to buy the company. Like how can I trust them? First of all, A. complete credit to you to understanding the upside for you as well with an earn-out where you can tap into some of the future growth of the business. But then B. you're involved in this process all the way through and you saw the importance of knowing who your buyer was and being able to trust that buyer to be able to grow the business and be confident. We've got a fantastic buyer. Like you said he was great through the whole process and I think he's going to kill it with the business.
Joseph: I don't think it would've been as easy to move forward if I wasn't as confident with the buyer. If it was a private equity group then I would have put the company in hands of someone who might not know how to manage an Amazon business effectively or specifically this kind of Amazon business. I think that because of this seasonality and SKU density I think it takes a kind of special approach to run a business and I think our buyer has that. So yeah I mean it's definitely important.
Mark: Yeah. On the flip side and I don't want to speak for the buyer. I'm hoping to get him on the podcast. He's agreed but he's obviously busy with a new business.
Joseph: He’s pretty busy.
Mark: So I totally get that but from his perspective where he's really, really smart is not only did he buy a business with some really strong forecasted growth, he bought a business where a lot of other buyers weren't even looking because they just discounted it saying UK, I'm not interested. And so it gave him some advantage as far as that. And look let's be honest it took a little bit more effort for us to find a buyer. We had a number of conference calls and nothing materialized. At the end of the day, we had a couple of good qualified buyers that were kind of competing but it took a bit for us to get there. Was her point; I'll answer this after you do, but was there a point along the way where you thought that this isn't happening?
Joseph: You know, to be honest. I think at the start I felt like it wasn't happening the right way because a lot of the buyers that we’re getting on calls were trying to keep me pretty significantly involved in the company and structuring their offer so they're otherwise around me to having salary or retained in a large amount of equity unless upfront cash. So it's a bit like maybe there's too much value in me and not what the company is actually doing and I'm so this unique entity. But eventually, with some of the other offers we received, we started to see some buyers really saying the value in the business too. Yeah I mean overall I don’t know; I don't think at any point during the process I was particularly worried that it wasn't going to happen. I think there's always a buyer out there for what you're selling if you know what I mean. Like it's just what I was selling was a very specific thing that required someone who was willing to take a pretty significant amount of risk. And yeah we found that person.
Mark: Yeah, and then again the offset to that risk for him is the upside on this, right?
Joseph: Yeah.
Mark: The upside is getting significant. And look there is value in you but I think from a buyer's standpoint when I look at how that dynamic worked out; I mean you were pretty vocal upfront saying I don't want to be working in this business moving forward long term just because you have other interests. You have a newborn son. You want to spend time with that son and that's totally reasonable. All the same, you are going to be doing some work with the business here moving forward mainly because you and this buyer get along wonderfully. And so he's accomplishing what other people we're trying to wrap up early on by really just having a good relationship with you which again is just as; we preach about this all the time, right? If you want to be a good buyer and be successful be likable.
Joseph: Yeah I mean honestly I was a bit concerned because the buyer and I was sharing a lot of information about the business before close and in the end I just discounted that nagging thought in the back of my head to should I trust this person, are we actually going to close, are they just trying to gather information and then pull out or whatever and try and compete and yeah, I just put my trust in and the buyer and I think that really paid off.
Mark: It's easier to trust a buyer when you see that they're spending a lot of money as well on their side with advisors, right?
Joseph: Yeah exactly.
Mark: That would have been an expensive fact-finding mission for him. Let's talk a little bit about some of the tax advantages. I mean we've already talked about just the advantage of the 45% to 10% on your side. But something you brought up; you came up, by the way, for people we didn't say this before but you came out and actually visited me here in the Twin Cities as well as Scott who lives in the Twin Cities. We had dinner. It was great. It was along with Eric as well from Redpath. The first time a client has come up and visited. It’s fantastic; a lot of fun. But one thing you brought up in that conversation was the tax savings that you were able to generate as well on the money with; the cash within the business which is one of his kind of hidden benefits that maybe we weren't anticipating early on.
Joseph: Yeah. I mean I kind of knew it existed as an option but because moving into the process I wasn't 100% sure if we would actually get a seller’s stocks deal; I knew that was a big driver so something we were pushing forward but I’m… yeah, so basically to summarize the working capital and inventory within the company can also be released tax efficient during the earn-out because it's counted as working capital. So basically you sell the cash of the company and the inventory to the buyer and they then cycle that back to you. I mean you can do it as quickly as 10 days. We’re allowed longer so we've got time to kind of work out the accounting side but they effectively buy the cash and you're giving it back at the entrepreneur’s rate so the 10%. So instead of having to [inaudible 00:21:53.3] to take that money as salary or income and dividend, you can pull out the business into a personal through entrepreneur's relief at 10% which is a nice benefit and something that for anyone at sell-side you should really be considering the year before you sell your business you want to be building your cash reserves because you can pull that money out extremely tax-efficient right.
Mark: In your case, it was; I won’t put a number to it but there was a significant savings probably taking a large chunk if not the entire chunk of some of your advisors that you were paying to help us.
Joseph: Yeah Mark, for sure [inaudible 00:22:30.6].
Mark: And so yeah we take a look at that; again the path that you sort of blazed here for a lot of other UK sellers with all these advisors, we have a pretty nice path down. I want to just touch briefly on some of the tax savings that we saw on the buy-side. Are you familiar with much of that or shall we pass over that?
Joseph: I mean I think it's important. I don't totally understand the details; very, very top-level view. I know there's structuring that you can do with different entities in a holding company that achieves an effective tax rate of 21% then they sort of; a tweak of that is if you then pull all the company activities into the USA you don't have a person in the UK, the UK office, or whatever country you end up running the business in you don't have what's called permanent establishment in that country. So then the effective tax rate ends up being at 26%. So again it's still not bad like the flow-through tax rate of an LLC is 37, right? So, whatever happens, it's an effective way to use the dual tax treaty between the UK and the US and same with some other countries like Canada and Australia like some that you said before but yeah when it comes to the actual structuring that's more for a tax advisor to kind of discuss but yeah like it's one of these things. So once you get past the liability which can be solved contractually it presents a huge opportunity for both buyer and seller which is I think an important thing to have those conversations about because it's not just the seller that benefits from effective tax rates.
Mark: That's right. So just to kind of recap here what we're talking about here is going from an effect of 37% here in the US. When we think about buying an Amazon business we typically look at just straight-up asset sale, you set up a new LLC and then you're going to have your earnings on that business tax at that 37%. Under this structure, it would require a different sort of setup with these companies and one could do with the details in that meeting because I don't want to get something wrong here on this episode. I hope to have Eric from Redpath on who can discuss this in more detail. But effectively going from that 37% like you said down to an effective rate of what was it 25%?
Joseph: 21 or 26 depending on which country the operations are run out of.
Mark: Right. And so that can be significant savings if you are seeing earnings well into the six figures. And in addition to that having that structure set up so if you were to say as a buying group I want to buy in the UK because let's face it there's a lot of U.K. companies that are really, really powerful and doing some amazing things. You now have a vehicle within UK to be able to acquire some of these properties and save on the tax rate as well. It's a double bonus there. My opinion from the buy-side it requires a little bit of setup but the benefits are definitely there long term.
Joseph: I think it's one of the cool things that we sourced towards the dinner we had was not many other buyers are looking at these companies. And I think that gives the buy-side another competitive advantage. It's like some of the other larger brokerage firms they're not looking at UK companies. I remember having some initial contact conversations with my broker and the second we mentioned it was a UK company they basically took a 0.5 multiple off the company because they were like yeah we don't do that, we don't do stock, we don't do you know. And I think that approach to UK companies means that there’s more of them available.
Mark: Yeah. With a US-based company, we have this tendency where if you don't move quickly as a buyer and by quickly I mean days you're going to lose it and with a UK company often. And it didn't happen in your case actually when we actually got down to that LOI stage things did move rather rapidly. But there was luxury for some of the earlier buyers to basically take their time because they didn't have; normally we have a dozen or more people looking to have the property. In this case, we had less than that looking at this closely enough or for some competitive pressure. But I think that was crazy. And I think the pace was a bit more comfortable. What do you say; let's flip around a little bit here and kind of round out with this, there's a lot of UK sellers out there that may be looking at this and saying I've never really considered selling my company. Some of the things that you would recommend you’ve already mentioned building up some savings in your account before going to market. So that you can pull that out as a favorable tax rate but what else would you mention to UK based sellers that maybe haven't considered this before.
Joseph: Yeah, sure. I mean I'm not sure what advice I have specifically for UK sellers. I have some good general seller advice like have your numbers in order, know your inventory values, have inventory management software if possible so you can pull inventory numbers at any given time, know your way around your balance sheets like having numbers over to a buyer as quickly as possible helps them be informed and helps you get the deal closed. I think that's fundamental you don't want to be waiting for your accountant to get this information. I mean for UK buyers I don't think I have any really specific advice or any more detail but like the buyers are out there. There are interested parties willing to look at structuring options and get deals done. I think it's an exciting time for UK companies which is not; there are options out there to get closes that are tax favorable for a UK company.
Mark: Yeah, I would agree 100%. Again it's a bit of an eye-opening experience for me as far as just what we can do and where we take a look at the deal, structure it smartly from the beginning. I think the other lesson that I did pull away from this was just the benefit in bringing on good advisors. I know both on the buy-side and sell-side I see people hesitate sometimes. Maybe their books are a mess and so we recommend that they hire a bookkeeper. We have a number that we recommend that just do good work and sometimes people they balk at that. I don't want to spend 3 or $4,000 but the benefit you get out of hiring a good adviser I mean it pays for; it should pay for itself. It should pay for itself. Well, this is great Joseph. I know that there are going to be people out there who have questions about this. Are you open to having some of them contact you by email?
Joseph: Yes for sure I'm happy. Anyone who wants to talk to me either buy or sell-side I'm probably not going to give you any detailed information in structures that I don't truly understand but yeah happy to sort of field any questions that this might bring up.
Mark: Okay well, we will place some contact information for you in the show notes to this episode so I'll get that from you. I really appreciate you coming on here and taking the time to talk about the deal. I know it's not always comfortable talking about the deal that you've just closed because most of us let's face it we're introverts.
Joseph: Yeah. I should be on holiday now really anyway.
Mark: You should be instead you're still doing all this stuff. Hey, thank you for coming on. I appreciate you sharing your story with us. Thanks for trusting us to do the deal and most importantly as much stress as it was also just a ton of fun.
Joseph: Yeah I mean I was generally enthused by the process. I really enjoyed the negotiating and closing and selling a company. It’s the first time I've ever done so yeah pretty exciting.
Mark: I can't wait for the next one.
Joseph: Yeah me too.
Mark: Sounds good. Thanks, Joseph.
Joseph: Alright, thanks, Mark.
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