Are your clients thinking of selling, strategically and realistically?
Your client thinks it's time to sell their business and they obviously want the best price for it. The question is, is it actually ready and optimised for sale?
Business owners often have a few things going against them:
- Having an unrealistic idea of their business's value.
- Not understanding what's involved in selling their business.
- Wanting a clean and simple transfer.
So, how does your client maximise the value of their business?
A business prepared for sale is normally worth more than those simply put on the market without a strategy.
The best time to start planning a business sale is two-three years before owners intend to sell. This gives them time to get their business ready for the best possible price and easiest sale. Deal with issues in their business, make their business sale ready and consider tax planning issues of a sale.
The owner is not the business
Businesses with one person or heavily based around that person makes it difficult to separate the person and the business and inherently the goodwill transfer. The sale is therefore harder and the return is often lower. When a business is clearly separate from the owners, it is easier to bring in new owners as the skills and knowledge of how the business operates are retained and do not depart with the former owner.
The business or the entity
It's generally accepted that buying the business and not the entity avoids inheriting past legal and tax exposure. While this is true in most situations it's not an absolute rule. Benefits to both the seller and buyer include capital gains and income tax issues, stamp duty, and non-transferrable licences and contracts. As a business gets bigger, it becomes more common to sell the entity.
If selling the entity is desirable, having a "clean entity" without private items is important to limiting the buyer's risk of tax and legal exposures, which will assist in a successful sale.
The clean business
When selling a house in a messy state you'd expect the sale will be harder and you are likely to get less for it. A business sale is the same. A clean business includes:
- Ensure what's for sale is clear in the information memorandum (i.e. sale brochure)-without any surprises for the buyer. This also enables them to make an offer before the due diligence phase.
- Financial records should clearly separate the business being sold from other activities and assets/liabilities of the entity. Consider setting up departmental accounting so it's clear.
- Resolve any business issues e.g. a past customer issue, employee problems etc.
- Ensure good financial records, assets lists, customer data and tax documents.
- Ensure everything is complete, up to date and all lodgments are on time; this demonstrates good business management and lower risk to the buyer.
In certain circumstances it may be advantageous to restructure the business either legally or operationally before the sales process begins. This may be to separate business from non-business assets or change the operations to be more easily transferrable.
Vendor Due Diligence
As an advisor to a seller, you should do due diligence to include:
- Ensure all licences and registrations are up to date.
- Check the Personal Property Securities Register (PPSR) to ensure security for past completed finance has been removed. Check assets to be sold are owned and transferrable including domain names, business names, other intellectual property, and physical assets.
- Do a google search on your client and their business to assess what comes up-we all know the potential buyer will be doing one. Work out how to deal with anything unfavourable that comes up before selling.
Buyer due diligence
All buyers want due diligence completed to ensure they get what they are paying for. Building up the due diligence data file over time is far easier than a mad dash to get it all together at the last minute. Being organised with complete records demonstrates you know what you are doing. Constantly needing to find information the buyer requests, gives them the opportunity to walk away from the sale.
Forward thinking helps your clients access the available tax concessions. Several taxes from capital gains tax, income tax, and GST at the Federal level to stamp duty at the state level can be applied to a business sale. Past actions and how the sale is structured will affect how these apply to your client. To obtain some concessions your client must have done certain things or meet tests within the legislation prior to the sale. It's too late after the sale to think about tax.
Help your clients to maximise their final return from the business sale with strategic planning and the correct execution, which can lead to a major payoff.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.