Ready to Make the SaleYou could decide to sell a business for a variety of reasons. Perhaps you are seeking a new venture, you’d like to realise the value of the asset you’ve grown, you need the financial boost, or your business has become an expense and a drain on your mental health that you can no longer sustain. The first step is deciding whether you’re going to be selling your business privately, or through a business broker. Using the service of a broker makes the entire process less stressful for you. They can also help you understand any legal and governmental requirements, offer advice about the profitability of your business, and provide you with market trends for your industry. This makes each subsequent step that follows when you sell a business much simpler. It’s worth noting, however, that a broker only earns commission once the sale goes through. Therefore, they’re strongly incentivized to make that sale happen. As a result, some brokers are more interested in concluding a sale than they are in ensuring you get the best offer. A difference of $50,000 on an already high asking price (as an example) makes a minor difference to the final percentage that they earn on the sale. Next, during the sale of business, you need to decide what components are included and how they will be valued. You need to decide whether you’re selling your entire business with stock, equipment, property, and the business name, or if you’re just selling one aspect such as intellectual property or stock. It’s important to note that you could sell both tangible and intangible assets. For example, goods and equipment are tangible, as is business property. However, if you’re selling a service, the reputation you have established among your clients will add value to your business. Selling the value of this reputation would be considered an intangible asset (‘goodwill’).
The Value of Your BusinessThe next, often most difficult, step is evaluating your business to arrive at a realistic asking price. It is during this process that you’ll assess the value of all the assets that you’re selling which make up the entirety of the business. It’s often that many owners’ expectations are much higher than what a buyer is willing to pay. Owners need to have a good understanding of the value of their business long before it goes on the market for sale and should have their business valued every few years to avoid any disappointment when it comes to selling a business. There are a few ways you could assess the value. A starting point would be to look at other businesses, similar to yours, that have been recently sold in order to set a benchmark. This method isn’t a precise measurement tool, but it will give you a general benchmark when you’re preparing to sell a business. Some industries have particular indicators that determine value like a certain multiple on revenue, gross profit or net profit. A common method of calculating a business’ selling price is by looking at the net asset value; subtracting all liabilities from total assets to arrive at the net value. Total assets will include all physical and intangible aspects of your business, from stock, equipment, and property to brand, reputation, and intellectual property. This is a common approach when selling shares in a business rather than the underlying assets in that business. A popular method is to sell your business at a multiple of your annual net profit. This is an easy method for an investor to calculate their return on investment (ROI). The multiple used typically depends on the industry you’re in and the perceived risk at maintaining those profits. In a highly risky business, you may not get more than a multiple of one. With this method you also need to exclude any business owner influenced expenses (like a related party salary) from the annual profits to get to a “normalised” figure.
Business Tax ImplicationsDuring the sale of business, you have to think about tax. How much tax do you need to pay? It’s an important factor as for a lot of small business owners as with some careful planning, this could be the difference hundreds of thousands if not millions of dollars As with everything related to tax, it’s not that simple. There’s a couple of factors to consider. CGT If your business sells an asset such as a piece of equipment, or even the property of your business, you will either make a profit or a loss, depending on the price at which you acquired the asset, and the price at which you sold it. If you make a profit on the sale, you will be liable to pay capital gains tax (CGT) when selling a business. There are, however, some small business concessions that may be applicable to you, resulting in a decrease in your capital gains tax. These are as follows:
- 50% CGT discount: individual business owners, sole traders and trusts are entitled to a 50% CGT discount if they have owned the business for more than 12 months before the sale of the business entity.
- The 15-Year Exemption: if you’ve continuously owned your business for 15 years before its sale, you can be exempt from capital gains tax altogether – making this the most generous CGT concession offered by the ATO.
- 50% Active Asset Reduction: your business will be considered an “active asset” if it’s been operative for at least half the time that you’ve owned it. You’ll be entitled to a 50% reduction on the capital gains tax on the sale of your business if your business is deemed an active asset. The 50% active asset reduction is in addition to the 50% CGT discount.
- Retirement Exemption: applying for the CGT retirement exemption will allow you to set aside up to $500,000 of your capital gain. If you’re above the age of 55 years when you sell your business, you gain access to the concession immediately. However, if you’re below the age of 55 years, you’ll need to pay the exempt amount into a superannuation fund or retirement savings account.
- Small Business Rollover: you can choose to set aside the capital gain for up to two years until you buy replacement capital assets or make capital improvements to an existing asset. Essentially the deferred capital gain will be used to reduce the cost base of the replacement asset.
- If the sale includes everything that is necessary for the continued operation of the business; and
- If the business operations are continued, by you, until the day of sale.