Getting Your Business Sale Ready – Structure and Due Diligence


Getting Your Business Sale Ready – Structure and Due Diligence

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 contributed into superannuation in any given year and the tax treatment of super death benefits varies depending on whom they are paid to. Therefore it is important your Business Succession Plan take into consideration your Family Wealth and Estate Plan. We always aim to achieve the best outcomes for clients by working closely with Family Wealth Advisers to ensure a comprehensive and holistic strategy underlies everything we do.

It is important to the seller to ensure that the buyer sees the purchase as being attractive and simple rather than complicated and painful. And importantly the buyer will want to make sure the transaction is designed to make the “takeover” transition as easy as possible and retains value in the business.

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.

Accountants are often reluctant to advise their client to purchase an existing trading structure (and rightly so as they can contain hidden skeletons, tax debts, audits, claims by third parties, etc., etc. – which dramatically increase the risk) but they are generally OK with purchasing the entity described above – it does only one thing hold the asset!

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 and 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.

John Encina of Macquarie Commercial Finance says that correct structuring of the sale and quality information will not only help a seller get the best price but also assist the buyers capacity to finance the purchase. Most buyers will require some form of debt finance and providing quality information and flexibility structuring the deal will ensure the best result for all parties. We see many deals fall over due to the lack of information and flexibility from the seller, the buyers and their lender just cannot get their heads around the deal. Be prepared to provide detailed information on things like non-recurring expenses so the buyer can work out the true adjusted profit of the business.

The exercise of ensuring all documentation is up to date and easily accessible will add value to the business without doubt, the process will also ensure it is easy for you to find any issues in the business which will appear during due diligence – the business equivalent of a pest and building report – used by the buyer to negotiate a better price.

Break out box: Client Case Study

In a recent real estate sale, we restructured prior to the sale and transferred all of the property management clients into a separate entity designed purely to hold the asset – the property management client base and lease that asset back to the trading entity. This meant clients were not required to transfer management contracts upon sale and therefore loss of clients was limited to less than 1%

In other recent sales loss of clients (and therefore loss of value and real cash in the sale transaction) can be as high as 12% – leaving significant value on the table – compared the costs of a proactive restructure to maximise the value upon sale.

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