Owning a business often forms the keystone to securing personal wealth and a solid financial future. Although most owners know instinctively when it’s time to sell up, planning succession well in advance is important if you want to secure the best outcome.
Plan in advance
Getting the best price will depend on why you want to sell in the first place. It could be due to an unsolicited approach from a potential buyer, failing health, an unexpected industry downturn, or you might just be looking to retire.
Depending on the industry, this could mean preparing anything from one to five years in advance.
Structure your business for an exit
You need to make sure all the value isn’t just invested in you as the owner. This can be a particular problem for service-related industries. It’s important to develop a business model where the value is in the business, not a particular person.
If there are a number of business owners, make sure there’s a legally binding agreement that spells out agreed processes on how owners can exit the business, and how their share will be valued.
Planning for an exit could be especially important if there are family members or staff interested in acquiring the business when you step down.
You need a long-term strategy that maps out the transition and looks at how the sale will be structured. Plans need to begin well in advance of an exit to provide certainty that the business won’t suffer after the original management or founder has left. In some businesses, failing to make formal plans for succession can lead to unrest amongst family members and impact on financial results.
Consider tax implications if you’re selling your business, such as Capital Gains Tax and GST.
If you plan well enough in advance, you could make use of Capital Gains Tax Concessions for small businesses, which might result in little or no tax being payable on exit. One such concession is called the “Retirement Exemption” which allows the capital gain from sale of a business to be exempt up to a lifetime limit of $500,000.
Valuing the business
Getting the best price for a business depends on what a buyer thinks it’s worth. Valuation methods could include one of the following:
- Capitalisation of profit: This is the most common method for small-to-medium sized businesses. It looks at adjusted profits and applies an appropriate return on investment associated with the level of internal and external risk.
- Assets-based valuation: Looks at the assets of the business less any liabilities. Usually used for underperforming business, or business with no goodwill value.
- Market-based valuation: Based around recent sales of similar business – for industries where sales figures and information is readily available, this method works well.
- Discounted cashflow: Determines the present value of future cash flow adjusted for risk.
Tips to prepare
Most buyers are looking for potential to create future value from their investment by way of increasing profits. This might come from untapped growth areas, or the expertise that new owners can bring to the business.
Here are some tips to make the process easier:
- Get your business in order and make sure it’s performing well before you put it on the market. Don’t take on any unnecessary major expenditure that will take years to realise benefits.
- Be prepared to answer questions about your business from a potential buyer, especially around its future potential.
- Consider the best time to put your business on the market. If you’re a seasonal business, this might be towards the end of your business season.
As with many things in business, selling isn’t always straightforward. Make sure you get expert advice before you go to market from professionals including accountants, business brokers and lawyers. Having a guiding hand to help you through the process will make it easier and will mitigate risk.
Adam Griffiths, Director, DMCA Advisory