Business Sales & Purchases

How to sell a business: being willing to sell is not enough. Businesses need to be appropriately structured before any buyer would be willing to pay a price worth selling for. Do any of the following common issues apply to you?

a) Business is run through a trust

If you run your business through a family trust, then you may be limited to selling the assets of the business to a buyer. Some States (e.g. Queensland) charge transfer duty on the sale of business assets (in Queensland, duty is approximately 5% of the sale price).

In contrast, the sale of company shares does not incur any transfer duty. For that reason, depending on the sale price, it may be beneficial to restructure your business into a company structure, and sell the shares in the company instead of the business assets. Doing so will enable you to demand a higher sale price, and reduce your sale costs.

b) No proof of ownership of intellectual property

Does your business involve the use of important intellectual property? Intellectual property includes trade marks, patents, designs, trade secrets, technical know-how, copyrighted works (including methods, processes, training programs, software), and confidential information (e.g. customer and supplier lists).

Any diligent Buyer will want to see proof of the existence and ownership of all important intellectual property. Typically, such proof takes the form of signed intellectual property assignment deeds, employment contracts, contractor agreements, or similar documents. A failure to provide such documents will either prevent a sale, or cause significant delays.

c) Contracts prevent sale of business

Contracts entered into with customers, suppliers, and other third parties, may prohibit a sale of your business, or require you to obtain the other party’s consent before selling.

It is critical for you to review your valuable contracts before commencing the sale process to ensure that they are capable of being transferred to a buyer with the business. If they aren’t, then you may need to approach the relevant third parties to renegotiate contract terms prior to selling your business.

If any of the above apply to you, or to get a free business sale assessment, contact us and we will walk you through the legal aspects of selling your business.

The tax impact of a business sale depends on various factors. It’s different for every business owner so it’s a good idea to seek independent tax advice from an accountant or tax lawyer. However, some common issues include:

a) Excess cash held in the business

If you run your business through a company, you may have been retaining excess amounts of cash in the company as retained earnings. That cash must be extracted before selling, otherwise the Buyer will have to pay you for the cash.

b) No capital gains tax (CGT) discount available

You cannot access the 50% CGT discount if you run your business through a company and sell the business assets to a buyer. For that reason, it is generally a far better option to sell your shares in the trading company, as you are likely to be entitled to the 50% CGT discount.

c) Sale attracts transfer (stamp) duty

As mentioned above, some States charge transfer duty on the sale of business assets. While transfer duty is usually paid by the buyer, the duty cost (approximately 5% of the sale price in Queensland) will be factored in by the buyer in negotiating the terms of sale.

The worst thing you can do is sell your business without first obtaining appropriate tax advice. We’ve seen it many times before. No one likes paying more tax than they have to.

Many tax problems can be minimised or avoided completely. Contact us now to discuss the best tax strategies for selling your business.

The best structure for the sale of your business will depend on your legal structure, the state of your tax affairs, and the number of potential Buyers in the market, among other things.

Asset sales

Selling your business assets is generally an easier process. Negotiating the sale contract is straightforward as there are fewer points to negotiate. You simply identify the assets of the business and agree on the sale price for those assets with the buyer.

However, the actual handover of the business is far more complicated. As the direct ownership of the business is being transferred:

• customers and suppliers must be notified of the sale;
• premises leases and equipment leases must be transferred;
• employees must be terminated and re-employed by the new owner;
• business licenses and permits must be transferred; and
• bank accounts and other financial arrangements must be changed.

As mentioned above, sellers of businesses also generally pay more tax when using an Asset Sale structure.

Share sales

Selling your ownership stake in the entity that runs your business (such as a company) is more involved in the beginning, but far easier for business handover. Under a share sale structure, buyers generally undertake thorough due diligence enquiries to investigate the history of the company (in particular, its tax history). That is because they are inheriting the entire history of the company, warts and all.

Negotiating the terms of a Share Sale is complex and time-consuming. Typically, Buyers will want comfort (in the form of warranties given by you) that you have run your business properly and lawfully in the recent past.

However, once terms are agreed, business handover is simple. As the direct ownership of the business is not changing, there is a minimal impact on business operations. Customers and suppliers may not even become aware of the change of ownership until long after the sale occurs.

Lastly, using a share sale structure will also be very tax-effective. You are likely to have access to one or more capital gains tax (CGT) discounts, reducing the tax you pay on the purchase price paid by the Buyer. There is also no transfer duty payable on the sale of shares.

Choosing the right structure when selling a business is important, to say the least. We are experts in structuring business sales across all industries. Reach out now to discuss your options.

People are the lifeblood of any business. As such, it is vital to retain key people to build and maintain a sustainable business that holds real value (real value worth paying for by a buyer).

Buyers may be concerned about key people leaving the business after purchasing the business. This is a legitimate concern and should be addressed by any business owner well before of any potential business sale.

A common strategy used to retain key people is to bring on key people as part-owners of the business. For example, shares may be issued to key employees under an employee share scheme (ESS) or an employee share option plan (ESOP). It is worth noting that contractors are also eligible for shares and share options under the ESS/ESOP rules.

For businesses which qualify as ‘startups’, ESSs and ESOPs are extremely tax effective. This is because shares or options received by employees or contractors are not taxed until they sell their shares/options. Under the ESS rules, ‘startups’ are businesses that are less than 10 years old, with less than $50 million annual revenue. Many businesses will qualify as a ‘startup’ even if they do not consider themselves to be one.

Aside from ESSs and ESOPs, there are various other strategies which you may use to retain key people as part of a business sale. Contact us now to discuss your options.

Most buyers will undertake due diligence enquiries and investigations to determine the value of the business and its assets, and the risks associated with the business.

The extent of a buyer’s due diligence investigations depends on various factors. Arguably, the value of the transaction (i.e. the purchase price) is the biggest factor. The higher the value, the more thorough the buyer’s investigations.

Other factors include the nature of the business being sold, industry standards and norms, and the structure of the sale (asset sale vs. share sale).

The sale of your business can fail to complete if a buyer discovers any hidden problems with the business, or your selling entity’s business or tax history (when undertaking a share sale).

Prior to placing your business on the market, we recommend undertaking a pre-sale audit of your business. The purpose of an audit is to determine if there are any problems which might scare away a buyer. If there are, then we can discuss strategies to deal with those problems to ensure that your business sale runs smoothly.

The best time to contact us is before you sell, not after you list your business for sale. Reach out now to discuss strategies for ensuring a quick and painless sale.