Selling a business can be a challenging and stressful time, particularly if it's the first time and you don't know what to expect or what is required to get the right result.
When selling a business, one of the critical things to understand is the tax implications. What you are selling and how you are selling it will have quite different tax consequences. We've put together a Top 5 list of what business owners or investors need to know to maximise their result.
If your business operates through a company structure there are different ways to sell the business. If the company sells assets of the business (e.g. goodwill, equipment, intangible items), then the immediate tax impact rests with the company. If the intention is then to flow the proceeds of the sale to shareholders in the business, then there is a second taxing point. Depending on the circumstances, there may be options for managing this in a more tax-effective way.
However, if the shareholders are selling their shares in the company, then the tax impact is managed at the shareholder level and dealt with by each of the shareholders.
The overall outcome from a tax and cash flow point of view could be quite different. It's important that you get good advice as soon as you are thinking of selling the business to understand the taxing points triggered by the sale and what options might be available to improve the overall outcome. A good advisor will discuss the availability of any concessions and the conditions that need to be met to qualify for them.
The GST implications of any sale also need to be established up front. If the business is sold as a going concern, that is, it's 'business as usual' despite the sale, then the sale is generally GST-free. But, to ensure the sale is GST-free the parties have to agree in writing that certain strict conditions have been satisfied. If this issue is not dealt with, the vendor may be left with an unexpected GST liability that will basically come out of the sale proceeds.
Finally, consider the liabilities. For example, if you sell your business but not all staff are staying on with the new owners, the vendors will generally be responsible for the cost of redundancies and other employment costs.
Most purchasers will undertake some form of due diligence on your business. If you understand what the likely purchasers are looking for, you have the opportunity to ensure that your business is positioned the best possible way.
This may mean cleaning up your balance sheet or sorting out other parts of the business in advance of the sale. This way, you remove possible objections to the sale and improve your chances of achieving a favourable sale price.
During the sale process, it's not unusual to be asked for a lot of information about your business, its performance, and for your financials.
Just remember that not all prospective buyers are buyers – many will be looking for market knowledge and intelligence. It's important to cascade information through to prospective buyers as required to limit the potential of over-sharing with competitors. Generally, sensitive information should only be released under due diligence once key terms have been agreed.
Warranties and indemnities are a standard part of most sales agreements to protect the purchaser against declining performance and significant changes in conditions from what has been declared. It is essential that you understand what you are signing up to even if the chances of the trigger event occurring are slim. This includes limiting the dollar quantum of any indemnity and its time period.
In most contracts if you disclose information during the due diligence phase a warranty claim cannot be made against you.
Restraints are also a common part of a sale of business process particularly where the sale includes goodwill. Restraint clauses prevent you from selling your business then immediately starting a new business or becoming a part of a competitor's business using the goodwill you established. Where restraint clauses are involved, it's important to understand how long you are going to be out of the market for.
Selling a business can be a complicated process, depending on the scale and range of interests it has. Consulting a professional team on valuation, structuring the sale, and managing your tax liability is essential for success. If you are considering selling your business, contact us on 02 9957 4033 or via our contact form.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.