Making the decision to go ahead and sell your business is a big one! Your business is a huge part of you, your life, your family, and directly plays upon your emotions. Once you’ve crossed that line in your mind and decide that you’re going to sell, you’re now faced with the added stress of learning about the process. What documents do you need? How do you sell a business? What tax implications are there? What other requirements do you need to meet?
Our goal at creditte is to remove the stress and confusion for you. Here you will learn everything you need to know when it comes to the sale of business.
Ready to Make the Sale
You 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 Business
The 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 Implications
During 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.
Is there GST?
It’s important to be aware of what tax obligations will arise from the sale of business so that you plan accordingly and avoid nasty surprises. When working with clients who are either buying or selling businesses, we’re often asked: ‘Will I have to pay GST?’
The short answer is no. GST is payable on the sale of a going concern if certain conditions are met. A sale of going concern is:
- 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.
Asset or share sale?
In the sale or purchase of a business, a purchaser can either choose to acquire shares of the company that owns the business (i.e. share sale) or acquire assets directly from a seller (i.e. asset sale).
Depending on types of assets sold and assessment criteria for sale of a going concern, as discussed above, an asset sale may or may not be eligible for ‘going concern’ exemption for GST. We will not cover this in depth in this blog, due to the legal and commercial complexities in assessing asset sales as a going concern.
Staff
One area that’s often overlooked in the process is staffing. It’s easy to get caught up in the finances and administration of selling your business that you forget to consider your people.
Your employees will most likely be aware that you’re selling, particularly if you have prospective buyers coming to look at your premises and assets. They’ll be feeling uncertain about their own futures so it’s good to talk to them openly about the process, what they can expect and offer reassurances we’re appropriate.
Make sure you plan appropriately, and legally, to cover all employee obligations such as super and annual leave.
The Final Run
The final step in selling a business is to go through the transfer of leases, licences and permits, finalise tax returns, activity statements, and instalment notices. Thereafter, you will need to cancel your Australian Business Number (ABN) and transfer or cancel your business name.
It is important to note that, while you have a buyer and you are making the legal and official transfer of ownership, you are still responsible for any lease agreements and obligations that are part of your business until they are completely transferred to the new owner. Licence transfers can take up to 12 months, so it’s important to plan for this early in the process.
The Role of Your Accountant
If you want to sell a business you need to get good financial advice from an accountant that’s walked this road before. Any serious buyer is going to ask to see accurate financial records, usually going back three years. You’ll also want this information to form a realistic evaluation and asking price.
Our team at creditte have helped many business owners through the process of successfully selling their business and moving on to their next endeavour. We can help you prepare your financial records in a way that buyers expect to receive them and we can walk you through the entire process, ensuring you get the best advice and value for your business.
Book a free discovery call with us to learn about the process and how we can help you.
FAQ
What are the types of taxes that would need to be paid when selling a business?
Potentially GST, CGT and income tax depending on the type of sale and the circumstances!
What is taxable when selling a business?
You are liable to pay tax on the sale of tangible and intangible assets such as stock, equipment, property, branding, and intellectual property.
What small business sale tax exemptions are available?
They’re often known as the small business CGT concessions. If you own a small business, you can reduce your capital gain on active business assets you have owned for 12 months or more by 50%. Active business assets are objects that are used daily in the operations of a business such as the building, equipment, stock, or branding, patents, and copyrights.
