Sell the Company or Liquidate it?

At some point in their business journey, every owner faces a crucial decision: what to do with the company when it is time to retire, change direction or close an important chapter? From our experience as tax and legal advisors, we know this is not an easy choice.

In general terms, there are two main alternatives: transfer the company to a third party through a sale or proceed with the dissolution and liquidation of the company. Both options have advantages, drawbacks, and tax and employment implications that should be carefully analysed. Our aim in this article is to provide you with a clear overview, based on current legislation and common practice, so that you can calmly assess which strategy is best for your particular case.

Comparison: Sell the company or liquidate it?

Selling the company

When the company is still viable, has clients, active contracts and market positioning, selling is often the most logical alternative. Essentially, it means turning into capital the value of everything built up over the years.

How is the sale carried out?

The process of selling a company to a third party usually follows several stages:

Company valuation
Choosing the right method depends on the sector, company size and the objectives of the operation. In practice, the final price is usually negotiated based on EBITDA multiples or turnover.

• Asset-based valuation: based on the balance sheet, assets and liabilities.
• Earnings valuation: profits, EBITDA and sales are calculated.
• Intangible valuation: clients, brand, goodwill.
• Cash flow valuation: projection of the capacity to generate income in the future.

Searching for buyers
The buyer may be closer than you think: among your clients, suppliers or even competitors. It is also possible to turn to investment funds or companies specialising in mergers and acquisitions.

Negotiation and due diligence
The buyer will thoroughly review the company’s accounts, contracts and obligations. This process, known as due diligence, is essential for both parties to have full confidence in the transaction.

Sales contract
The agreement is formalised in a public deed and must be registered with Companies House. This regulates the price, method of payment, guarantees and possible non-compete clauses.

Employment impact

One of the most important points is that a sale does not terminate employment contracts. According to the Article 44 of the Workers’ Statute, employees keep their seniority, salary and conditions. The new owner assumes all employment and Social Security obligations.

This provides stability for the workforce and avoids severance costs, making selling a less traumatic solution for those who are part of the business.

Timeframes

Selling a company is not immediate. From our experience, the process can take six months to a year, depending on the complexity of the transaction and the availability of documentation.

Advantages of selling

• Immediate liquidity.
• Business continuity.
• Financial recognition of accumulated effort.

Disadvantages

• The negotiation process is long and complex.
• There are tax costs (capital gains, income tax or corporate tax).
• Finding a buyer may not be easy.

Liquidating the company: an orderly closure

The second option is liquidation, which means bringing the company to a definitive end. It can be a reasonable alternative when the company is no longer profitable, when there are no interested buyers, or when the owner prefers a quick and controlled closure.

Steps of liquidation

1. Preparation of the liquidation balance sheet.
2. Adoption of the dissolution agreement at a shareholders’ meeting.
3. Execution of the agreement in a public deed before a notary.
4. Registration at Companies House.
5. Tax deregistration with the Tax Agency and Social Security.
6. Distribution of assets among shareholders according to their participation.

Limitations

The law establishes that a company cannot be liquidated if it has debts with third parties. In that case, insolvency proceedings would be required. It is only possible to liquidate when outstanding debts are with the shareholders themselves.

Employment impact

Unlike a sale, liquidation does terminate employees’ contracts. This involves severance pay of 20 days per year worked, with a maximum of 12 months’ salary, provided there are objective grounds. If these cannot be demonstrated, the severance will be equivalent to unfair dismissal.

This means that, socially, liquidation has a greater impact than selling.

Taxation

Assets allocated to shareholders are taxed as a liquidation quota under the Transfer Tax (Corporate Transactions). Furthermore, if in the future a shareholder sells a received asset (e.g., a property), they will have to pay tax on the corresponding capital gain.

Advantages of liquidation

• Greater speed and control.
• Avoids dependence on external buyers.
• Definitely closes all future obligations.

Disadvantages

• The financial return is usually lower.
• It may involve significant tax costs.
• It entails the disappearance of the business project.

Which option is more suitable for you?

The answer depends on very specific factors:

• Economic situation: if the company is profitable, the natural step is to explore a sale.
• Outstanding debts: when these are high, liquidation may be more viable.
• Existence of buyers: without interested parties, selling is not possible.
• Personal objectives: obtaining liquidity, preserving the legacy or simply closing a chapter.

Conclusion

Selling or liquidating a company is one of the most significant decisions in any entrepreneur’s life. Selling allows the project to continue and provides liquidity, while liquidation is a quick and definitive closure.

At GM Tax Consultancy, we offer our expertise so you can make the best decision with all the information at hand. We will accompany you through every step of the process to ensure the outcome is safe, orderly, and tax-efficient.

Lawyer and Economist from Pompeu Fabra University, with a Master’s in Law and in Legal and Tax Advisory. Specialist in taxation of individuals and companies, he joined the firm in 2020. Member of the Barcelona Bar Association.