Selling Your Business
August 8, 2012
Selling a business isn’t as simple as selling a car or house. The implications are wider, and you’ll need a good exit strategy to get a great price. Here are a few suggested steps to make the most out of the sale:
Step #1: Decide whether to sell or not
Selling your business is a big step that can significantly affect your life. Whatever your motivation for selling, ask yourself the following questions:
- Am I really ready to sell or do I just need a vacation?
- Why am I selling anyway? Prospective buyers would ask why so be truthful, but don't risk ruining the sale.
- Is this the right time to sell? Would the company's value improve if I wait? Remember that the best time to sell is when the business is at its peak.
- What will happen to the staff? How would they be affected by the sale?
- Will trading in my profession be affected? This is commonly included in business sale contracts.
- Will I benefit monetarily from the sale?
Tax considerations in selling
- Goods and services tax
There might be GST considerations when you sell your capital assets. If you're GST-registered, see to it that you factor it in the sale.
- Capital gains tax
CGT is a type of tax that is levied when one makes capital gains from the sale of assets. Ask the Australian Tax Office for more details on CGT.
The superannuation system could affect what you do with the earnings from selling your business.
- Private expenses
If you're a private company owner, your private expenses should be separate from company expenses and should be treated as such when buying or selling a private company.
- Record-keeping obligations
You still need to keep business records (e.g. employee payments, sales and purchases, and payments to other companies) for five years even after selling the business.
- Finalising employee obligations
Settle issues like fringe benefits tax, eligible termination payments, pay-as-you-go tax, and superannuation for employees and independent contractors even after the firm has been sold.
- Filing final income tax returns
If a partnership has ended trading and all its assets have been distributed for the year, then inform the ATO on the final tax return filed for the partnership.
- Cancelling registrations
If you have an Australian Business Number, you have to inform the ATO within 28 days of selling the business. Cancelling your ABN would also cancel other ATO registrations.
Step #2: Prepare your business for sale
Preparing for the sale means you have to:
- Document all policies and procedures to enable the business to operate without needing you.
- Document all relationships important to your business. If some agreements are verbal, prepare a written one to legitimise them. Look at existing contracts and ensure they won't expire as the new owner comes in.
- Sell obsolete or redundant equipment, spare parts and scrap that are no longer needed.
- Sell obsolete stock to improve the company's sales numbers and prevent disputes over the value of the inventory during the sale.
- Clean and maintain your company's premises if necessary. Make sure your premises comply with all regulations.
- Ask employees to take their leaves and other entitlements to prevent the selling price from being reduced.
- Keep key employees during the transition to the new owner.
- Collect all accounts payable to prevent potential buyers from getting turned off from buying a business with clients who take forever to pay up.
- Ensure that your payments to suppliers are up-to-date to promote the impression of financial strength.
Step #3: Set the right price
Here are several methods in valuing your business.
- Asset valuation
This is about assigning values on each of your company's assets listed in the balance sheet. This would include physical assets like office equipment, supplies, prototypes and real property. Also included are intellectual property such as trademarks and patents, if any.
- Market value
Determining market value is done by calculating a company's earning potential based on market demand. You look at the market's current size and growth, and then study the competition. While there is a rule that having more competitors lowers the company's market value, you should also consider how secure the company is against its rivals. Finally, you look at similar companies that have raised money.
- Income valuation
This is done by predicting a company's future income and discounting it to compute its current value. Normally, start-ups are discounted at 30 to 60 per cent because of its uncertainty.
Step #4: Make the sale
When ready, it’s time to make the sale. You can look for a buyer by either employing a business broker or finding one yourself. If you decide to go solo, you can:
- Spread the word through your personal network.
- Advertise at trade journals, industry publications, the internet, and state, local and nationwide newspapers.
- Beware of non-genuine buyers like competitors, sellers of similar services, or bilkers looking to con someone at a low price.
- Once the buyer is satisfied after looking over your business and studying your financial documents, they can negotiate certain matters before making a formal offer.
- Just make sure that you consult a settlement agent or lawyer to resolve any possible issue and make sure that the sale is legal and binding.