Directors Loan Account - Write Off on Closing
August 22, 2024
by a searcher from INSEAD in Windsor SL4, UK
Dear UK Searchfunders, to get a deal across the line we may need to assist with clearing an existing DLA. Its a CFDF deal and if we could just write off (to balance the books) this Debt to assist the seller on clearing the other Debt aspects it could get the deal across the line. Any comments or thoughts on the possibilities, pros and cons of this would be greatly received.
from London Business School in Sevenoaks, UK
The approach I have seen used is that you overfund the deal (because you are buying a business and a separate financial asset - the Loan to director), but use a Payment Direction Letter signed by sellers as part of legal agreements so that on closing you remit the funds to settle the loan direct to the company that you own (not the sellers).
Downside of this approach is you need to find the funding (in theory it's only needed a few days), and the stamp duty on purchase of the shares is higher.
Generally the DLA then sits totally outside the DFCF adjustments mechanisms - you need to make absolutely clear the DLA isn't an asset you give value for through that process aswell.
from Simon Fraser University in London, UK
Another option is for the buyer to repay the loan at closing. One way it could work is if the director is a selling shareholder, to novate the loan obligation from the director to the buyer in consideration for a reduction by way of set-off of the purchase price owed by the buyer to the director for his/her shares. And then pay off the loan at closing. That gets rid of the loan, and is purchase price neutral.
None of this is legal, financial, tax or investment advice.