Selling a Business the Right Way

Managing The Finances and Proceeds of Your Business Exit

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I grew up in Sydney, in the Eastern Suburbs. My family was supported by my father, a builder, who worked incredibly hard his whole life. He created a successful construction business catering mostly to high-end residential homes.

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For anyone who owns a business, you will know that it’s never an overnight success.

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His business was built on 20-years of relationships – relationships with clients, suppliers and importantly, staff, many of whom completed their apprenticeship with him. More than that, he spent time, money and effort on brand-building, ensuring quality outcomes and a track record of doing the right thing.

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After 20 years of working in the business, my family made the decision to relocate to the Sunshine Coast. At the time, my father never really contemplated what to do with that successful business that he had built and all the relationships he had created over time.

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Our families’ decision to move to the Sunshine Coast saw him abandon that business, and start from scratch back up in Queensland.

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This is a moment in my family’s life that I often reflect on, particularly given my role where I work with clients who are in a very similar position. Many of our clients are private business owners, who come to a point in their life where it warrants change. Many of them then navigate a successful business exit.  

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I have not only seen – but guided – hundreds of business owners in the same position to go through the exact same life and business transition.

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Now I look back and consider what my Dad could have done differently if he had access to better quality advice – from a financial advisor, an accountant, a financial consultant – or simply a friend who could have pointed him in the right direction.

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My Dad had so many options:

• He could have sold the business to the right person for the right price
• He could have promoted someone within the business to manage it
• He could have allowed his employees to buy into the business; giving them an incentive by transitioning ownership to them over time.
• He could have partially sold the business, adding a strategic investor.

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In terms of an exit, the business could have been a very significant wealth creator for our family, but instead, my Dad didn’t have the knowledge, expertise or guidance to make the right financial steps. He also didn’t want to see his name and reputation put at risk if the wrong person was left in charge, or the quality of work was jeopardised.

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What are the right financial steps that business owners should consider when selling their business?

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Most of the families we work with are – or have been – successful business owners. They spend a large part of their life building these businesses – they often become the largest assets they will ever own.

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It should be expected that with appropriate planning, the sale of this asset can become a very significant wealth creator for these founders and their families.

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It’s also important to start this planning far before you are planning to sell – in fact, the earlier, the better.  

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Just as most businesses won’t become an overnight success; a successful transition out of the business won’t either. It requires careful planning and often, advice.

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The Structure of The Business

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Prior to getting to the point of eventual sale, it’s important to ensure that you have the business structured in a way that can lead to the best outcomes.

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For example:

• If your business is involved in more than one type of operation, are they segregated into different entities?
• If there’s an underperforming asset, should this asset or operation be segregated from the core business?
• Should earnings be normalised to present your business to a potential buyer in the best light possible?
• If you were to sell the business, what would be the right structure to lead to the best tax outcome?
• How should your business be valued – on what metric and who should be the valuer?
• What parties might be interested in potentially acquiring your business? And how do you approach them in confidence? You don’t want to approach them and notify your existing customers that you might be exiting from the business and potentially jeopardise those relationships. You also don’t want your competition taking advantage of this information.

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So it’s important to think about the structure of your business and the approach you take in terms of how you can bring together the right type of potential buyers but do so confidentially.

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How to Present a Valuable Business Sale Opportunity

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It’s also worth considering how you should present the opportunity to them and how you encourage multiple bids on your business.

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Often, we see our clients get approached by one competitor with an offer to buy their asset or their business. Quite often, people focus solely on the opportunity in front of them and they don’t put it out to a big enough network to encourage the classic ‘buyer’s tension’.

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Just like an auction on a residential property, you may consider attracting multiple interested parties with multiple bids, which could eventually push up the end sale price. This type of competitive bidding can often see the owner walk away with 10-50% more, significantly improving their family’s position from the exit.

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What Type of Business Sale Best Suits You?

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It’s also worth considering what type of sale best suits you –  whether you are interested in a trade sale to a similar or competing business, a private equity firm, who may also bring some kind of new expertise to your business and help it scale, or potential roll-up with several similar businesses – collectively taking it public by IPO or sell as a collective to a larger organisation.

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What Do You Want to Achieve From the Sale of Your Business?

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Then in regards to the terms of the sale, what do you want to achieve?

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Do you want to continue working within the business on a set salary, or with an earn-out period?

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Do you want to make a partial sale and maintain control over business decisions?

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Or rather than an exit, are you looking at expanding in a sale as more a strategic decision as opposed to simply borrowing debt? So taking on equity rather than debt?

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Tax Implications of Selling Your Business: What tax concessions are available?

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The next consideration would be the tax implications of selling your business.

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There may be tax concessions available to you to utilise but in general, tax implications can vary considerably on a business sale.

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If funds are being paid to a corporate entity, capital proceeds could be taxed anywhere between 25% to 30%. If then distributed to an individual, they could be subject to top-up tax if the individual is on a higher marginal tax bracket. If paid to a family trust, there may be an opportunity to distribute income to several family members (an example is adult children) which could potentially lower the total income tax paid.

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You may be eligible for capital gains tax discounts based on what entity owns the business and the time that the business and underlying assets have been held.

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Often, assets held for 12 months or more in a personal or trust structure can see capital gains tax discounted by up to 50%.

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Other assets for example, if held prior to 1985 when capital gains tax was introduced, could even be tax-free. So it’s worth exploring those conversations with primarily a qualified tax accountant and secondly a financial advisor that specialises in SME/Business Advice.

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There may be other options available, but it’s always useful having an accountant – it may be worth even getting a second opinion from a second accountant to ensure the advice is the best available.

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It’s also worthwhile to include your financial advisor in these discussions to plan for a future financial strategy after the sale – particularly how your assets are going to be invested and what your long term financial goals are.

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There can also be other concessions available, so depending on several factors, there could be an opportunity to use the business, small business CGT concession. This would allow proceeds to be reduced, disregarded or deferred for some (potentially all) capital gains from an asset.

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You may also have the option of contributing a substantial amount into your super in addition to the standard contribution limits that typically apply. We talk time and time again to our clients about the benefits of super.

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Superannuation is widely regarded as the most beneficial tax vehicle in the country. Earnings are typically taxed at 10% – 15% while you are in the “accumulation phase” which means while you’re still working. Once you reach retirement age, your earnings and the pension paid from super can then be tax-free. Being able to contribute extra above yearly contribution caps is a great strategy that can have a lot of benefits.

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When selling a business, you may want to consider what vehicle reduces the tax payable on your business sale, but also what vehicle will help support your goals from a tax and investment perspective moving forward. This obviously varies from family to family.

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It’s also worth considering how you structure your investments from an asset protection point of view as well as planning for the future – whether that is your children’s future, charitable giving or a passive income in retirement for you and your partner.

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So how can business owners determine their next life and financial goals after selling their business?

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There’s usually a driver behind a business sale and by ‘sale’, I’m referring to complete exit.

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In this scenario, founders might want to take the capital out to support their retirement or to spend more time with a family. Maybe they are selling to support their health or live a better lifestyle on their own terms.

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While these goals and reasons are all different, typically they all have one thing in common: they require passive income.

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In this regard, planning will focus significantly on how we can maximize returns for a certain level of risk for each client after fees and also after taxes. This requires a well thought out investment strategy, investment policy, the right investment structures to reduce tax and the right advisor to take the worrying and the stress out of decision making so the founder can enjoy what really matters most of them.

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High profile owners or families often want to give back to the communities that have helped them achieve their success. This liquidity event can be used to create their own wealth and also commonly, to create a private charity known as a private ancillary fund (PAF).

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This strategy can not only provide a tax deduction on the sale of a business but also a tax-free vehicle with funds in earnings of those funds in the path being used to support charitable giving in the future and ideally doing so in perpetuity. In effect, this creates a legacy asset for the business owner and the family to give back to their communities.

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But ultimately, after an advisor, a tax accountant and potentially an M&A consultant has helped you navigate an exit on terms that you’re satisfied with, goal planning should really focus on what matters most to you and your family. It is your advisor’s role to talk through what investment choices, structures and strategies will be best to facilitate your pathway to achieving these goals.

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How can business owners create a financial plan and substitute the absent cash flows to maintain their desired lifestyle? How do you best manage the sale proceeds with an effective investment strategy?

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We find so often that business owners concentrate almost all of their wealth back into their businesses. This shouldn’t come as a surprise because given the growth of any new business, new staff, new technology, new premises, new stock marketing, etc. – these all carry higher capital costs. However, we also understand that accumulating wealth in any one asset can carry concentration risks.

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Businesses can and do face many challenges that often can be out of one’s control. And COVID-19 was a great example of this.

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My point is that every business owner should have a plan to reallocate some level of capital out of their business and into passive investments that help cushion them and their family in the event of unforeseen events. This is not dissimilar to an insurance policy.

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Business owners should begin planning for this as soon as possible, rather than simply leaving it to at or near a planned business exit.

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Many of our clients have or have had substantial retained earnings whilst operating their businesses. Some of this capital will be required short term, some mid-term and some longer term. The different expenditure needs of any business can allow an advisor to invest this capital accordingly earning a rate of return above cash at the bank – particularly in this very low-interest rate environment.

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Once a business is sold, we manage this capital in a similar way: a bucket approach where some capital will be required for short-term living expenses and other amounts for longer-term capital growth. Becoming familiar with the different types of asset classes and various roles that they play – defensive or growth, fixed income or equities – and how these can be used to achieve your goals and match your investment horizon is key to making wealth work smarter and not harder for you.

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Work with EW Wealth: Financial Advisers Specialising in Business Exit Strategies

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If you’re interested in discussing how – as a business owner –  you can invest retained earnings from your business, diversify your wealth, or plan for an eventual business exit as successfully as possible, speak to one of our advisors today.

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Emanuel Whybourne focuses on addressing the needs of successful business owners and we live and breathe this advice every day.

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Nothing excites us more than helping a family achieve its long term goals not only within a business, but looking forward to the lifestyle they want to live in the future.

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Get in touch with us today.

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Regards,

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Ryan

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