Preparing a business for sale is a complex and often long-term process, which requires a lot of preparation and planning. Yet few business owners are prepared when it comes time to be sale-ready.
Exit planning involves careful preparation and consideration of the business, tax and legal implications. Here are five tips to help business owners prepare for a successful business sale:
Business owners should start preparing early to minimise the risk of a failed transaction and to optimise the value of their business. Anticipation of internal and external factors, including market conditions must be anticipated and managed prior to sale.
A seller must provide key factual information for a potential buyer through the due diligence process. Due diligence is a time-consuming process requiring a lot of documentation. A business’ failure to keep adequate and accurate financial records can severely damage their sale price and slow down the sales process.
Reduce risk for buyers
Sellers must be very careful to ensure that information provided and statements made in the lead up to the sale are accurate and not open to interpretation. Be sure to provide a clear business forecast and realistic ongoing business model.
All verbal conversations with the buyer should be followed up in writing, such as email, as informal conversations can be relied upon for Court proceedings after the sale. Ensure the contract of sale is well-drafted and states in plain English what you understand to be the agreement.
Evaluate different exit options
It is not necessary to sell 100 per cent of the business immediately. A gradual exit can benefit both parties. For purchasers, it retains customer goodwill and gives new owners time to adjust to the business’ operations. For sellers, there is the advantage of keeping an interest in the business and demonstrating its worth to the new owners.
If you are passing the business on to family members, the transition may be over a number of years. A formal succession plan can help guide the business through a smooth transfer of control.
Understand tax implications
Sellers may need to pay GST or capital gains tax (CGT) on some of all the business assets they sell, including land or buildings, or intangible assets, such as patents, licences or goodwill. Some small business concessions and exemptions may apply. Sellers will also need to cancel their GST registration within 21 days of ceasing business, and their ABN within 28 days. Business records will need to be kept for at least five years after the end of financial year in which the business is sold.
Avoid insufficient disclosure
To avoid a claim that there had been insufficient disclosure of financial information; sellers must ensure that the Disclosure Statement accompanying the Contract of Sale (or information provided in due diligence) complies with statutory requirements. Where the Disclosure Statement is sufficient, the responsibility is then shifted to the buyer to conduct their own enquiries about the suitability of the business.