The process of selling your business should start a couple of years prior to when you actually want to sell. You are looking to set your business up to maximise the sale price and minimise tax.
The biggest barrier to achieving the sale price you want is actually one of your greatest strengths - the reliance of the business on you. If you are no longer there running the business, can it operate smoothly?
Many small businesses are reliant on the owner having a hand in most things. They're the main contact for customers and suppliers, they know the products off the top of their head, they make all the major decisions. This is often efficient and cost-effective, however when it comes to selling all of the goodwill is on your shoulders.
When the time to sell does come, you need to be organised. Purchasers will see this as an investment, and like all of us expect a return on their investment commensurate with the risk of running your business. You need to prove that your business is a low risk option.
Your differing records need to match up. If your POS system shows one figure, and your accounting system a different one, it erodes trust and confidence - increasing risk in the purchasers eyes.
You can't expect to justify off-the-books cash to a purchaser because there is no way of verifying it. You can say there's $50,000 of cash that goes through the business, but unless it shows on your tax return, you can't expect someone to pay a premium for it.
The general philosophy in valuing a business is:
- Given a small business is a risky investment, a purchaser will expect a return on investment of 25% or greater (we often use 33% as a guide which works out to be 3 times profit). Why should a purchaser expect less when they can get 10% - 15% in property and shares which are relatively safe?;
- Your accounts (profit / loss) need to be "normalised", which means adjusting the figures for items that are not necessary or not being charged at market value (for example, if you draw a wage as the manager of $40,000 for 60 hours of work - that needs to be adjusted up to what you would have to pay an external manager for those hours);
- Profits need to be maintainable in the future. Having a stellar year last year that's a once off may look good, but any purchaser doing their due diligence will refuse to pay a premium for it because your history (and by that we mean your accounting records) say that it won't happen again;
- Don't expect a purchaser to buy themselves a job. Why would someone pay $50,000 for a business that only enables them to draw our what they would earn working a normal job?; and
- All assets required to run the business are generally included in the price and calculations - don't expect to sell for "x times profit plus assets".
When you've found a potential buyer, you need to provide them with a sale of small business statement (also known as a Section 52) if the sale price is under $350,000. This provides 2 years of trading history and has to be signed by a qualified accountant as an accurate record of your figures.
There are different ways or structuring settlement. You may agree on a variable price depending on how the business performs next year (i.e. if clients leave the business because you are no longer there, you are paid less), or possibly settlement is over a number of years. There is no right or wrong here, it's entirely up to both parties.
And then there's tax... Business sales are taxable items. There are various concessions that can reduce the taxable amount (and potentially to nil), and the settlement structure and contract can have an impact on that - so ensure you get the right advice to start with.
If you are looking to sell your business, contact us for help.
The decision to purchase a business is a major one and shouldn't be taken lightly. Chances are the aim of your purchase is to provide you with the income stream you desire for the next decade or more - so it's important that you get it right.
Firstly you need to fully understand why you are buying a business? Is it purely financially motivated? Is it a lifestyle choice (i.e. buying a surfing store on the coast)? Is it to ensure your children have a business to grow into?
Understanding the why will help you work out what factors are important to you. If it's a lifestyle choice then you may not be overly concerned about maximising profits and instead want to ensure the business can be sustained by the hours you want, or that there is a suitable manager already in place.
When looking at a business to purchase you should perform a SWOT analysis to help you understand the situation better so you make a more informed decision:
- Strengths. What does the business do well? Can we maintain that?
- Weaknesses. What does the business do poorly? How easy is it to fix those?
- Opportunities. Is there a shortage of the product or service in the market that can be exploited?
- Threats. What competition does the business face? Are there any environmental regulations, Government planning concerns etc?
You also need to perform your due diligence. The purpose is to verify that what the seller is telling you (i.e. are the sales figures accurate, are tax obligations up to date, do debtors pay quickly) and to verify that the business is a viable operation.
Ensure you know what obligations you have regarding staff. Generally annual, sick, and long service leave will carry through with the business, so ensure the purchase price reflects those liabilities that you incur.
Assets that are unencumbered (free from loans or other security) is a must on transfer of a business. If another party has security on them based on loans that you don't hold - your newly acquired assets are at great risk.
The price is vital. Don't pay a price you can't justify based on the evidence in front of you and don't pay for "potential" - if it's your hard work that will realise this potential, you should be the one to benefit from it, not the seller. If you are borrowing to purchase, ensure you can service the loan without dipping into other savings.
And finally the structure. The structure that suits you will depend on factors such as:
- Tax minimisation;
- Asset protection - ensure your other personal assets protected from issues within the business;
- Estate planning - if something happens to you, you need to ensure the business can pass to the people you intend; and
- Succession planning - make sure the structure is one that can be easily changed in whole or part to add partners later on.
Just because your neighbor has a company, doesn't mean it will be best for you. Get expert advice from people who have the experience and training in these areas - simply contact us.