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Getting your business sale ready – Structure and due diligence

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Getting your business sale ready – Structure and due diligence

By , October 2, 2009
money-lots

Most business owners when they prepare their businesses for sale are really not sure what that exactly means – they probably know they need to have a bit of a cleanup both literally and also in terms of documentation, client records and files but they’re really not sure what else needs to be done to adequately prepare the business for sale.

In my view one of the first things that should be undertaken is a structural review – is your business in the most appropriate structure both for you in terms of capital gains tax and family wealth planning to ensure the capital proceeds from sale attract the minimum capital gains tax and also end up in the most appropriate structure for the future.

For example, business owners over the age of 60 can earn tax free income inside their superannuation. However limits apply to the amount that can be contribute into superannuation in any given year and the tax treatment of super death benefits varies depending on who they are paid to. Therefore it is important your Business Succession Plan takes into consideration your Family Wealth and Estate Plan. Succession Plus aims to achieve the best outcomes for its clients by working closely with Family Wealth Advisers.

It is important to the seller to ensure that the buyer sees the purchase as being attractive and simple rather than complicated and painful. For example, in real estate businesses – following sale a reasonably high percentage of property management clients can be lost in the process of transferring to the new owner – therefore if you have an appropriate structure which avoids this step the buyer will be able to retain more of those clients in the new business.

Capital gains tax is an inevitable part of any business sale however there are significant concessions available for small business owners specifically designed to reduce your capital gains tax liability. Access to those concessions however, is conditional on meeting several criteria and it is a complicated area of tax law. The solution is to get proactive advice well prior to potential sale not to leave it until the business is sold to discuss the implications with your accountant or tax adviser.

What else should be done to prepare the business for sale – well I can tell you that buyers are prepared to pay more for businesses that have documented systems, policies and procedures; they will pay more where they see no need to substantially upgrade equipment, IT systems & infrastructure, they will pay more when the business has clearly documented sales, marketing, budgeting and cash flow plans going forward at least two years. They will also pay more where clients are engaged with the business formally as in signed retainer agreements or fee arrangements and certainly any kind of ongoing passive income stream attached to the business is highly valued by buyers it reduces the risk and increases the likelihood of overall financial success of the business.

In real estate businesses this may well be as simple as the ongoing income stream from your financial services referrals – we have one client who generates nearly $400,000 per annum in this area – a solid established passive income upon which a buyer could easily rely to cover overheads and costs of the business going forward and therefore dramatically reduce the risk of the purchase.

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.