Selling a business

We’re often asked the best way to sell a business.

There are two key components at play in the sale of a business:

Structuring the transaction

Positioning the business to the market

Both elements are important and can significantly impact your result.

Structuring the transaction

Structuring the transaction covers areas such as pricing the business, the terms and conditions attaching to the sale, key terms in the contract, and ensuring the transaction structure is as tax effective as possible. Much of the structuring is about ensuring the vendors secure the most efficient and effective outcome from the sale.

What you are selling and how you are selling it will have quite different tax consequences.

For example, let’s say the business is operated through a company structure. If the company sells the assets of the business (e.g., goodwill, equipment, intangible items etc.,) then the immediate tax impact rests with the company. If your intention is then to flow the proceeds of the sale to the shareholders, then there is another taxing point that needs to be understood and managed.  Depending on the circumstances there may be options for managing this in a more tax efficient way.

However, if the shareholders are selling their shares in the company, then the tax impact is managed at the shareholder level and dealt with by each of the shareholders.

The overall outcome from a tax and cashflow point of view could be quite different. It’s important that you get good advice as soon as you are thinking of selling the business to understand the taxing points triggered by the sale and what options might be available to improve the overall outcome, including the availability of any concessions and the conditions that need to be met to qualify for them.

The GST implications of any sale also need to be established up front. If the business is sold as a going concern, that is, it’s ‘business as usual’ despite the sale, then the sale is generally GST-free.  But, to ensure the sale is GST-free the parties have to agree in writing that certain strict conditions have been satisfied.  If this issue is not dealt with, the vendor may be left with an unexpected GST liability that will basically come out of the sale proceeds.

Finally, consider the liabilities.  For example, if you sell your business but not all of the staff are staying on with the new owners, the vendors will generally be responsible for the cost of redundancies and other employment costs.

Positioning the business

Positioning the business for sale is all about ensuring that you achieve a sale and maximise your price. It covers areas such as ensuring there are no hurdles within the business that will limit its saleability, identifying the competitive position of the business within its market segment, ensuring that operating performance is as good as it can be, and that the business benchmarks well in its market. Positioning also includes identifying the best time to take the business to the market, how to take it to the market, and who the most likely buyers will be.

To do this, you need an objective assessment of how the business compares in its market, its competitive position, and what if any impediments to sale exist – all the things a buyer will look at and look for when they assess your business.

Most buyers believe that we are currently in a buyer’s market and will try to drive down price expectations.  Whether or not you are in a buyer’s market depends on your industry segment but regardless of this, you are in a competitive market. Buyers may also be comparing your business to similar businesses but also opportunities in other industry segments.

Getting your house in order

Most purchasers will undertake some form of due diligence on your business.  If you understand what the likely purchasers are looking for, you have the opportunity to ensure that your business is positioned the best possible way. This may mean cleaning up your balance sheet or sorting out other parts of the business in advance of the sale.  This way, you remove possible objections to the sale and improve your chances of achieving a favourable sale price.

1. Profit margins

Buyers want to see healthy margins and a predictable stream of income.  Take a close look at your product/service offerings and ensure that you are aware of the profit margin of each item.  This means looking at purchasing or supplier costs, and then the mark-up you are passing onto the customer.

Unmonitored expenses can also be a cause of profit bleed.  Often when a business is experiencing strong sales they’ll have some cash flow breathing space and expenses go unmonitored.  It is not until the business may face shortage of work that the owner starts looking for ways to cut costs.  Keeping a close eye on expenditure at all times, not just when cash flow is tight, is vital to the health of your business.

2. Strength of brand

Your business should have a clear value proposition and compelling offer.  Positive brand equity allows you to charge more for your product or service, because people are willing to pay a premium for your name—just as they pay a premium for jewellery that comes in a little blue box or electronics with an apple logo on top.

Customers are not only willing to pay more for a product with strong brand equity; they’re also willing to stay loyal to that business over many years. This kind of brand loyalty increases the value and marketability of your business.

3. Systems and processes

Work towards creating a workplace that is based on systems and which isn’t reliant on the owner to maintain performance.  Sole traders or small businesses will find this harder to overcome.  However, as you grow, ensure you place importance on refining the systems and processes in your business.  Ensure your systems are documented, implemented, followed and continuously improved.

4. Quality of customers

Choose your customers wisely – good customers tend to attract more good customers, and vice versa.  Be wary of chasing the money and exposing yourself to volatile customers or poor payers.

Also, keep in mind the old adage “don’t put all your eggs in one basket.”  Depending on a small customer base for most of your revenue makes you vulnerable.  What if they change leadership and the new management goes in a different direction?  What happens if they go bankrupt?  Well-positioned businesses mitigate this risk by having a diversified and broad customer base thus making their business more stable and more valuable to a potential buyer. You can read more about finding new customers in this article.

5. IT systems

Quality IT systems are the backbones of most businesses.  Investing early in reliable infrastructure will facilitate the smooth running of your business.  If your IT is in disarray, expect to lose buyer confidence.

6. Experienced workforce

Dedicated and experienced staff can be a key asset in the eyes of a buyer.  Key staff who have helped you create a valuable business are themselves an important part of that value.  Strengthen your team through selective recruitment and training.  Look for staff who will create value for your business, and managers with the skills to help you manage growth and achieve best practice.  Clearly communicating your vision and strategy to staff will also help to motivate staff and gain their buy-in to value-adding goals.

7. Potential revenue

Buyers want to see potential and will be more interested if you can demonstrate that your business has capacity for growth, or that can be scaled up.  For example, if you develop good business systems and operating manuals, you can show buyers that the business has the potential to become a franchise, expand into other geographical locations or acquire smaller competitors.

8. Financial management

Know what the critical numbers are and how they affect your business.  Having a clear understanding of your business’ financial performance, and meticulous record keeping, will not only help your bottom line in the short term but demonstrates to a potential buyer that the business is well managed and that finances are kept in check.

9. Less reliance on YOU

When considering the value of your business, you need to take yourself out of the equation. Your business should be an asset you own, not an extension of yourself.  It should be able to operate without your daily involvement or leadership. If the business cannot function without you, it is going to be a major problem for a new owner.

Do you have a Value Gap?

A value gap is the difference between what your business is worth today and what you need it be worth to achieve your personal, family and business life plans.

Knowing your value gap, and working on bridging it, is particularly important if you’re depending on your business to fund your retirement. When you know there’s a gap well in advance, you’ll have enough time to implement value creation strategies.

We have many clients that check the value of their business every year as part of their family wealth creation plan and to reduce their value gap risk. We use industry valuation benchmarks to pinpoint areas where you can improve your business value. With ‘what if’ and ‘revaluation’ analysis technology, our Business Improvement advisors can create a plan for you to get to (or exceed) your desired business value.

Further help

Our free online Value Improvement Course has been developed to show you how you can have greater control over your future wealth by working on your business’s profitability and performance.

You’ll learn about the factors that determine value, detract from value and increase value.

We know you’re busy so we’ve made it a crash course in business value. You’ll only need to set aside 40 minutes and you can complete it in your own time.

And as a bonus, at the end of the course you’ll receive an industry valuation benchmark report which you can use to compare your business to top performers in your industry.

Marsh & Partners business advisors are forward-looking specialists with industry expertise to help identify and mitigate value disruptors.  We work alongside you all year, not just at tax time.  To find out how we can assist you with valuations, exit planning strategies and value improvement plans, talk to a Marsh & Partners advisor.  You can reach us on (07) 3023 4800 or at mail@marshpartners.com.au.