Like most things in life, when you are selling a business, it is only when you ask the right questions that you can get anywhere close to the right solution. Here we get you started with some of the basics:
What is for sale?
Do you intend to sell shares in your company or the business assets from within the company?
A purchaser might prefer to buy the business assets – then they do not inherit the risks associated with the company, such as any underpaid tax from prior periods.
A sale of shares may suit the seller better – the 50% Capital Gains Tax discount can apply on a sale of shares by individuals and trusts. A company does not get this benefit when selling assets.
Do you really want to sell the whole lot?
You might consider structuring your exit through a gradual sale of shares to management or to family members over a number of years, instead of an outright sale. This could result in a higher return for you, as the business continues to grow in value, but allows you to take a step back from the business when you need to.
What is included in the sale and what is not?
The purchaser and the seller often have different ideas of what is actually part of the business. Expectations should be clear from an early stage so that no one’s time is wasted.
What is in and out of the deal can have a significant impact. For example GST does not have to be charged by the seller on the sale of a business under the “going concern” rules. An exclusion of some business assets could mean that this special GST treatment cannot apply.
How much will you get for it?
Not surprisingly the buyer and the seller will not always agree on what the business is worth.
A recent study in the US found that 20% of business sales failed because the seller thought the business was worth more than the buyer did, and they could not reach a compromise.
Learn the real value of your business and monitor it over time
If you are selling, have your business professionally valued before you start talking to potential purchasers. Let there be no surprises at the negotiation table.
Better still, have your business valued regularly in the five years before your planned exit. You will then have the chance to work on the key value drivers, such as profitability and cashflow, to maximise the price you ultimately achieve on a sale.
When is the best time for you to sell?
It is never too early to start thinking about your exit strategy.
There are many factors to consider when thinking about the timing of your exit including:
- market trends
- economic fluctuations
- social trends
- family dynamics
- your own health, and
- your personal goals.
It can take at least three years to plan effectively for a business sale. Double that if you want to improve business performance to make it more attractive to a buyer. With effective exit planning you are likely to experience a more profitable and smooth transition.
Consider the impact that the timing of the sale has on your tax bill
Your ability to access the valuable Small Business Capital Gains Tax Concessions can depend on:
- the turnover of your business, or
- You family’s net worth.
As these will fluctuate over time, the right timing can be key.
Even if these special concessions apply generally, the rules are complex. Good tax advice is required to maximise any tax concessions available when preparing for a business sale.
No one wants to be the guy who disposes of his business after 14 years, missing out on a CGT exemption to bring the tax down to zero if he held on for one more year.
When you have dedicated your working life to a business, letting go can be an emotional process. This is a major life change and you should plan accordingly.
Should I stay or should I go?
Will you remain with the business under its new ownership? This is often negotiated during the sale as it can provide for a smooth transition.
If you are staying on, you might consider incorporating an earn-out clause into the Sale Agreement. This could provide some security to the purchaser to ensure you will continue to dedicate yourself to the business. It could also maximise the price you receive for the business. An earn-out is usually a further capital lump sum the seller receives if the business meets set objectives.
If you walk away the day you sign the dotted line, have something lined up for afterwards.
Even though they have achieved a great price for the business, business owners are often left a bit lost and in some cases depressed once they’ve sold up.
Be sure you plan how you will enjoy the fruits of your labour. Otherwise what was it all for?