5 key considerations when preparing your business for sale

After many years of running a business, there comes a time when the urge to sell up and move on may strike.

Whether you're winding down ahead of retirement or simply ready for something new, selling your business is something you need to prepare for carefully and patiently. There's a lot to organise and consider when preparing a business for sale - here's where to start.

1. How long will it take to sell your business?

This process takes time. In an ideal world, you'll have a comfortable timeline ahead of you to prepare your business properly. Refreshing your business growth plan and focusing on maximising profitability will make your business more appealing to prospective buyers - but it can't happen overnight.

It's a great idea to allow a few years to really make the sale worthwhile. Don't rush the process - get professional advice now. An internal valuation and forecast for your business can help you make positive changes for a higher sale price.

2. Who will you sell your business to?

Generally you'll be selling your business to one of three buyers:

●    A competitor.
●    A key employee.
●    A family member.

If you're selling to a competitor, it's likely they'll have their own processes and operations in place already – reducing the costs associated with operating the business independently. Buying your business will also allow them to grow their client base and revenues to expand their market share. For these reasons, they may be willing to pay a higher price.

Sales to employees are more likely to be staged over a number of years, buying the business over an agreed period of time. You may need to consider a shareholders’ agreement, setting out the expectations for all parties involved.

Passing the business to a family member might be less motivated by profit and more on ensuring the business stays in the family.  Decisions such as who will take over the business and how the business will be transitioned from the parents to the children can be a source of family tension and disputes.  A documented Family Agreement that sets out how the business will be run and the key roles and responsibilities of each family member can improve communication between family members and minimise disputes.

Deciding to sell is a big step - make sure you've considered what it takes.

3. Is your business dependent on you?

Key man risk is a common issue among small businesses. As the founder and leader of the business it has been largely dependent on you with your knowledge and skills critical to the continued success of the company.  

When planning the sale of your business, you need to transition your knowledge and replace yourself with an experienced management team so the business can eventually run without you. Reducing key man risk will make your business more attractive to buyers and increase the sale price.

You should also think about how your company's brand is tied to you. If you share your name with the business, it may be necessary to change the name and rebrand to make it more attractive to a potential buyer. 

4. Is your business organised to maximise its sale price?

The sale price for your business is generally calculated on a net profit multiple, with the multiple ranging from one to five for a privately-owned business. 

The multiple for your business is determined by a number of factors including its financial history, forecast earnings, its management team, operational processes and brand. All of these factors combined are used to determine what a potential buyer is prepared to pay for your business.  

To maximise your sale price, you need to work on increasing the profitability of the business and improving its key business assets such as its management team, operational processes, and brand. If you are not satisfied with the financial performance of your business, work with your accountant or business advisor to implement a profit improvement plan.  

In addition to working on your numbers, focus on improving the key business assets that will generate improved financial performance over the longer term and maximise the price buyers are willing to pay for the business. 

5. How can you reduce tax on the sale of your business?

There are four capital gains tax concessions available to small business owners. It's important to check your eligibility for these concessions ahead of the sale of your business:

●    15-year exemption: If you've owned your business and assets for 15 or more years, any associated capital gains can be disregarded.
●    50% active asset reduction: An active asset owned for at least 12 months will enjoy a 50% capital gains concession.
●    Retirement exemption: You're able to disregard capital gains up to $500,000 in your lifetime. If you're under 55, the proceeds must be contributed to a super account to qualify.
●    Rollover concession: If you plan on investing in another business, you can rollover capital gains from the sale into this business to defer the tax. 

Selling your business is a key milestone and life event. Executed properly it can set you up for a comfortable lifestyle and create a better financial future for you and your family. It’s therefore critical to get the right advice to ensure you make the most of this opportunity.

Reach out to VBA today to discuss how we can help you maximise the value of your business.