Buying or selling a business is a big decision. There are lots of things to consider in the process; from the type of sale you are going for, to the business’ value. This article will break down the key things you need to think about, whether you are the buyer or seller in this situation.
Selling your business
Deciding to sell your business requires you to answer the fundamental question: ‘why?’. Understanding your motives for sale will help guide you towards the best route for you and ensure you have considered all factors like your employees’ wellbeing and tax implications.
Conducting a business valuation
A factor in deciding whether to sell your business is how much it is worth. Determining if it is worth selling or holding onto for a little longer requires you to understand the current market value for your business. A business broker should be engaged to conduct a business valuation. A business valuation produced by a business broker will be different from a valuation produced by an accountant. That is because there are different methods for valuing a business, and a business broker will usually take into account industry and market conditions, as well as recent comparable sales. An accountant’s valuation will usually only be based on the owners’ equity shown in the balance sheet (i.e. owners’ equity = assets – liabilities).
Asset sale versus share sale
Now that you have decided to sell, it is crucial to think about what you are selling. The two main options here include an asset sale or a share sale. If you are looking to sell your business assets without changing the underlying ownership of your company, then an asset sale might be for you. Meanwhile, a share sale can either be a complete or partial buyout when the buyer buys shares in the underlying company from the existing owners.
Clean up your corporate structure
Get your house in order before you putting your business on the market. Having an inadequate corporate structure could lead to your deal falling through due to delays, being put on hold until you restructure, or leave you with a poor tax outcome if you proceed with selling without having optimised your corporate structure beforehand.
Engage a business lawyer
Ensuring your sale process goes through all the necessary legal steps is vital. You should involve a business lawyer to advise you on the sale contract and negotiate on your behalf. Your business lawyer will ensure there are no loose ends once the deal is complete.
Buying a business
If you are thinking of buying an existing business, then there are several things you need to consider. Starting with a small business can be a great place to begin, giving you room for growth.
Think about the industry
Ensure you choose a business that will help you meet your goals, instead of choosing a business based on some pipedream that is unlikely to provide you with an adequate return on investment (ROI). According to the Department of Industry, small businesses made up 33.7 per cent of the private industries in 2011, and 84 per cent of those businesses are in the services industry. Mining, manufacturing, agriculture, forestry and fishing make up the remaining 16 per cent. With that in mind, consider working in that industry for a while to understand its mechanics.
Do your research
Your due diligence is an essential part of buying a business. There are thousands of businesses for sale, so if you find one you are interested in, do some more digging. Find out what their current customers think of them, or go as a mystery shopper to see what it is like in person. Consider if there is room for expansion into e-commerce in the current business model. In 2018, Australians spent a total of A$28.6 billion online, making it a booming sector of the economy. Thinking ahead like this in terms of your business plan and model will help you determine if that business is right for you. This investment needs to be profitable for the future, so be thorough.
When you are putting together a deal, remember to consider the transaction costs.
If it is an asset sale, you will need to take Goods and Services Tax (GST) into account. GST will only apply if the buyer is cherry picking parts of the business, and not buying all of the assets required to continue running the business as a “going concern”. GST is not applicable to share transactions.
Transfer duty depends on the state the business is located in. For example, in New South Wales transfer duty does not apply to goodwill, intellectual property or plant and equipment. Transfer duty will only apply to plant and equipment if the buyer is also taking over the seller’s lease or acquiring an interest in land. In Queensland, however, transfer duty will apply to the entire purchase price. If GST is applicable, then transfer duty will be calculated on the GST-inclusive amount.
Understanding these additional transaction costs is essential in ensuring your purchase is profitable.