Sale of the company and deadlock between the partners: How to prevent them?

Selling a business is one of the most important moments for owners in their business journey. However, it often does not come without obstacles. Family ties, different expectations of partners or unexpected life situations can deprive owners of control over the process. How to avoid these stalemates?

Unexpected and unexpected life moments

Business owners most often encounter two types of situations.

• Expected: retirement, a situation where the children do not want to take over the business or a decision to sell the business to a third party.
• The unexpected: death of a key partner, divorce or one of several partners disagreeing to sell.

In each of these cases, a simple rule applies, what is not agreed and written in advance can turn against you in a moment of crisis.

Clear rules and independent evaluation are key

A frequent cause of disputes is share buyouts between shareholders. Different ideas about the value of the company, based only on subjective feelings, can quickly block the discussion. The solution is an independent valuation of the company, only this can provide a fair basis for negotiations.

Similarly, it is important to set clear rules in the memorandum of association (or shareholders’ agreement) early on. These determine:

• what majority decides on the sale,
• how the value of a share is determined when it is sold between partners or to a third party,
• what happens to the share on death or divorce,
• whether the heirs can join the company or will only be financially settled.

Such pre-set rules can withstand unexpected crisis situations.

Dead equity, inheritance of shares and legislative limits

A common problem is also the so-called dead equity – a shareholder who ceases to actively participate in the running of the company, but still owns an equal share. At the same time, given the state of Slovak legislation, the regime of inheritance of property shares in companies is also problematic to a certain extent, where only the legal form of s.r.o. and j.s.a. allows the exclusion of inheritance of business shares, or shares in exchange for a compensatory share calculated according to the agreed rules.

While in the Czech Republic family businesses can already rely on instruments such as foundations or trust funds, the Slovak legal system is still limited in this respect. This complicates both generational changes and asset protection.

Until the Slovak legislation moves forward, Slovak business owners are left to either seek partial solutions through contractual arrangements or corporate structures or to create a superstructure using the foundation funds available abroad.

Tax implications of the sale of a company

In addition to legal issues, you also need to think about taxes. The sale of shares by a shareholder can potentially be exempt from tax if the shareholder, a legal entity, meets certain conditions – holding at least 10% of the shares in the target company for at least two years and fulfilling the substance requirements. However, many owners only discover these rules by the time a sale offer is already on the table.

Preparing the structure for sale early can thus mean the difference between a potentially zero tax liability and an unnecessarily high tax burden on the sale.

How we help at Highgate Group

At Highgate Group, we assist clients with the entire process of selling a business, from preparing for sale to completing the sale. We identify potential risks, prepare the company from an accounting perspective, design an appropriate tax and legal structure for the sale and prepare complete transaction documentation for the sale.

The sale of a business is a complex transaction that requires a combination of legal, tax and business (practical) perspectives. This is where our strength lies.

Listen to the full interview on this topic with Tomas Dem in our Highgate Talks podcast.

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If you are interested in this topic, please do not hesitate to contact us:

• Tomas Demo, e-mail: tomas.demo@highgate.sk

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