Top 3 tips for getting the most from your business sale
In a recent blog, “Selling your business part 1 – is your business being undervalued?” we asked why baby boomer business owners’ businesses are being undervalued when it comes time to sell?
Given the surprising amount of business owners, like you, being caught out with an undervalued business come retirement, we thought you might appreciate the top 3 tips for getting the most out of your business sale as well as a few legal issues that you might like to consider prior to selling.
3 top tips for getting the most from your business sale
- Seek professional valuation early – One of the biggest problems that seem to riddle baby boomer business sellers is that they do not anticipate it. It is important you allow plenty of time for planning your retirement so you can account for market conditions and technological changes that might impact the depreciation of value of the business over the years. The price you have in mind might not align with your companies’ actual value. Thus, a good strategy would be to seek a professional valuation much earlier. This allows for you to decide whether to sell now or to work with your team or accountant to take the necessary steps to increase your company value before listing the firm for sale at a later date.
- Sell internally – While you might be quick to think of a family member to sell your business to, you might want to think again. Family members usually have little to no industry knowledge and are skeptical about being able to succeed in the business in the first place. And it is sometimes hard to get a good price when you are dealing with family- if you still want to talk to each other at Christmas. What about selling your business to one or more of your employees? The pitfalls of following other strategies can be avoided by selling to employees- many of whom have invested interest in keeping the business going. Your buyer will already be familiar with the business and lenders are usually more willing to finance senior and long-term employees. Not only are you able to sell to someone you trust, this deal also comes with peace of mind that your business is still in good hands.
- Your involvement after sale – Although it may seem obvious, your involvement after sale could prove a big incentive for the buyer to remain confident about the robustness of your business and hence, they might offer a better price. Your ongoing involvement can be very important in high-touch industries where customers value personal relationships or in scenarios where the buyer has very little industry knowledge and could use some help to get things up and running.
Other factors to consider when selling your business
Clarification on what exactly is being sold
It is important to clarify and agree on what exactly is included in the sale of your business. It may seem a bit obvious but for small or inexperienced business owners, disputes commonly arise when the parties involved are a bit vague on what exactly is being sold and what may be retained by the original owner. Businesses can be very different from one another, but here are some of the important elements, which should be common to most businesses, regardless of the industry:
- The business name
- Any plant and equipment that the business uses
- Any property owned by the business
- Any agreements the business is a party to (including leases, distribution agreements, customer contracts etc.…)
- The contact details of the business
- Information relating to clients
- Any shares in the company that operates the business (this would be unusual – when selling a business the business is normally sold as a going concern; shares are not usually transferred)
- Anything else, whether tangible or intangible, that can be of assistance in operating the business.
- Any IP trademarks, logos, designs, patents etc.
How is the purchase price to be apportioned?
The purchase price is usually the first item on the checklist when negotiating a deal? Depending on whether your small business is manufacturing or service based, the valuation will be considerably different. Once the total price has been agreed, it is necessary to apportion it to plant equipment or goodwill. If your firm is a manufacturing business, a greater importance will be placed on the plant and equipment when coming up with a number. Service businesses are a bit trickier especially for small businesses as a large proportion of the valuation will depend on the goodwill- the likelihood business will leave when the owner moves on.
Note that there are important tax consequences when selling your business, which will largely depend on how the purchase price is being divided (see point 6).
Is the buyer enforcing unfair restraints on you?
At times, the buyer may want to put a restraint on whether you can operate a similar business after the sale has been completed. A restraint is usually placed on a geographical basis (e.g. within a kilometre radius of the sold site) or it can be on a time basis (e.g. 1 year from the day the sale was made). Restraints are common when a niche business is being sold. They are less common in more commodised industries. If a restraint seems too restrictive or unfair, there can be legal actions available so as to negate such restrictions. But try to understand what’s at the heart of this – seek to find a way forward that’s mutually beneficial.
Training periods (crossovers)
It is quite common in small business deals where the buyer will want to keep the seller involved in the business even after the sale. This is essential because they may need help in getting their heads around the business and how things are done. He/she may even ask you to train any new staff members that he/she will bring in. Training periods are usually pretty short – somewhere between one week and a month.
There are usually laws in place, which require the buyer to continue the employment of people who were already working for the company before the sale was made. The terms and conditions of sale are very important here. It should clearly mention that the buyer has agreed to take over the business and not make any changes to any of the employees’ contracts or compensations. If the buyer decides against working with the current employees, the termination of contracts should be clearly identified as one of the conditions of the sale. Any compensation or severance packages paid must comply with the laws regarding compensation in Australia.
It’s important to carefully consider the tax consequences of the sale before agreeing on the structure of the deal. Issues that should be considered from a tax perspective include:
- GST- GST may apply to the sale, or it may not, depending on the structure of the deal. If it does apply the purchase prices will obviously be impacted by 10%.
- CGT – Capital Gains Tax may apply in full, or the seller may be eligible for a concession (the most common one being the 50% concession for assets held over 12 months). The tax rate on the sale of the business that will apply to the seller can vary between 0% and 49%. Remember, the higher the tax rate, the more you will have sold the business for!
As always, if anything above strikes a chord with you, we recommend you seek professional advice. If you’d like to chat, you can always give Kerry a call on 6023 1700, drop us a note or connect with Kerry via LinkedIn.