Before a business sale, decisions matter by the millions

Think selling a home is stressful? Try selling a business.

Gradually relinquishing control is one of the hardest things a business owner will go through. It is a complex, often emotional path to set up a business to survive without its owner – but it makes a business more valuable and ultimately strengthens the owner’s legacy.

Privately-run businesses usually need to be extensively overhauled before they become a tradeable asset. Good pre-sale decisions can ease this process and create value, while the absence of them can see value stripped away.

Minimising a business’s sale value

Many businesses were bought or founded decades ago by Baby Boomers and operated over a period of exponential change.

During such progression, businesses can often end up operating with systems that work for the owner but are impenetrable for new entrants. Intellectual property and key processes may be undocumented. The books may even be full of personal debts and expenses.

Sometimes there are glaring risks. Could a successful cyber attack, an untimely court action, the refusal of a landlord to renew a lease, or the departure of a key staff member, wipe millions of dollars from the company’s bottom line? Is the company insured properly, or at all?

Crucially, does the business still rely on the owner? Is the business owner making excuses not to delegate or renounce control and cede themselves from the business?

Maximising a business’s sale value

Succession Plus chief executive officer Craig West says the first thing he organises for new clients is a business valuation. After accounting for assets, debts, capital-gains tax and other transition costs, a business’s net value may be different to what its owner expects.

“They key thing is, you have to work out what have they got,” West says. “In most cases they don’t know what the business is worth. Is it saleable? Can they pass it on to their kids? Sell it to their employees? They don’t know what their options are.”

After learning the true worth of a business, West says the owner needs to ensure the amount they get will be enough for a comfortable retirement, and find strategies to de-risk the business while maximising its value.

They must run through a number of issues and questions:

• Does the company’s branding reflect the segment it is targeting? It may need an update.
• Does the company rely on continually making new sales? Using long-term retainers or extended contracts can attract recurring revenue which buyers value more.
• Are there systems that can save time and resources while making processes more transferrable and less reliant on key people?
• Some businesses will make strategic acquisitions or expansions to bring the business to a size that is ‘right’ for the industry and market, helping it attract a higher sales value.
• Incentives can lock in talent and minimise key-person risk. This can include tax-effective salary packaging plans, bonuses, profit-share plans and employee share-ownership plans.

Preparing for the buyer

The question of who a business will be passed to is crucial to its preparation.

It could be transitioned to family members, sold to employees, merged with a competitor or even liquidated (if its assets are more lucrative than its operations).

Lawyer Clinton Jackson, a partner at Brisbane-based Cooper Grace Ward, says some of his clients have been implementing succession arrangements for a decade or more. Which he says, is advisable, as ‘lining up the ducks’ shouldn’t be rushed.

“Often there are issues with structure, the ability to obtain finance, the current needs of the business: they all just need to be managed and massaged to make these things happen properly and efficiently.”

A thorough legal due diligence can clean up the business to make sure problems don’t arise during the sales process.

It’s often at this point that an owner will realise one of their foundational business decisions has significant importance. How the business was structured has major implications for how it is run and sold.

• Setting up as a sole trader may have been simple and cheap, but at sale time it limits the business to an asset sale with all business assets passed to the new buyer.
• Structuring as a company or unit trust allows the business owner to sell their ownership of the entity which retains ownership of the assets, or sell a certain percentage.

Don’t be lax on tax

There are a range of tax concessions available in business sales and they are impacted by the business structure, how it is run, how profits are distributed and a range of other factors. Also, duty law varies significantly across different state jurisdictions, so there is no one-size-fits-all approach to managing the tax implications of a sale.

Some owners who don’t take enough care with the process end up missing out on their capital-gains tax discount and pay a large and unexpected tax bill, Jackson says. Some business owners find it is more lucrative to take reductions in the purchase price to a get better tax result, he adds.

ANZ Private senior banker Paul Van Ross says it is common for business owners to lose a significant chunk of capital to tax impost when they sell their businesses, so it is important to think how that can be managed through options such as philanthropy before the sale goes through.

“Philanthropy is one option that will give some sort of tax concession ongoing, and quite often that can be something that’s opportune, it allows them to do more structured giving and gain a tax concession on the way through.”

Selling a business is also a good time to assess the skill base of your team of advisers, he says. It is common for business owners to remain loyal to advisers that have been with them since they were a much smaller operation.

“They may not need a tier-one accountant, they may need a more complex adviser,” Van Ross says.

He had one client who wanted estate planning done by their lawyer, but further investigation made it clear they were actually an IP lawyer.

“They were far from being a specialist in estate planning. After we had that discussion they had it done by our in-house lawyer,” says Van Ross.

Learn more about life after business