Whether you are selling your business because you have to, or because you are planning a well-earned retirement, it pays to step through the process carefully.
In particular, if the sale isn’t handled correctly, you could find yourself receiving a hefty tax bill, as selling a business triggers capital gains tax (CGT).
Don’t rush it!
It’s important not to take some time because there is lots of preparation to do.
You will need to be clear about exactly what is being sold; whether assistance will be provided after the sale; how customers, employees and suppliers are to be notified; and whether existing leases and hire purchase arrangements will be transferred.
Decide whether you want a clean outright sale, or are prepared to accept an earnout arrangement or buy-sell agreement. Most potential buyers will want to an independent valuation, so you need to have your business documents organised and updated.
If you operate your business as a franchise, check your franchise agreement for any special clauses relating to a sale.
Tax considerations
Although tax is often the last thing on your mind when selling, it shouldn’t be. It can have a big impact on how much of the sales price you get to keep.
Capital gains tax (CGT) is the biggest tax issue to consider when selling, as your capital gain is calculated on the sale price of the asset minus its cost base.
CGT applies to company shares and goodwill, but does not apply to trading stock and depreciating assets used solely for taxable purposes, like business equipment.
While CGT can be expensive, small business owners are able to access several valuable concessions. These are in addition to the normal 50 per cent CGT discount applying when an asset is owned for more than 12 months.
Applying the four small business CGT concessions can eliminate or substantially reduce the CGT payable on a business sale if the annual turnover is under $2 million.
However, your business must meet basic eligibility conditions for CGT concessions. As the rules are complex, speak to us for more information before deciding to take advantage of these concessions.
Increasing the saleability
Part of your pre-sale planning process should also focus on ways to improve your business’s appeal to potential buyers.
Establishing a detailed succession plan can make the process much smoother. The Department of Industry offers an online template you can use to develop your plan.i
Working through this process can help ensure your business isn’t dependent on your profile or name to be viable in the long-term, making it more attractive to buyers.
Spring cleaning your business
Other important tasks include updating your business’s accounts and business records and generally tidying up the operation so it presents well to potential buyers.
Most potential buyers will require three to five years of financial statements and other business records so they can value your business. They will also want to review the business’s income tax returns and details of physical and other assets (such as goodwill and intellectual property).
Information about your customers, competitors, sales information, debtors and creditors, insurance, inventory and marketing activities also needs to be available.
As part of your preparations, you should also review your obligations in terms of employee and contractor entitlements such as tax, superannuation contributions and long-service.
Get good advice
Key to ensuring a successful exit from your business is getting professional advice early in the process.
And don’t forget that you will need to keep all records relating to sales and purchases, employee payments and payments to other businesses for five years after the sale.
If you need help preparing your business for a future sale or want to know more about the implications of disposing of business assets, call our office today.
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