Selling a business

What to fix in the twelve months before you sell

Buyers pay for certainty. Every question a buyer cannot answer becomes a discount or a retention.

• Clean up the financials. Personal expenses run through the business are add-backs a buyer has to take on trust. The fewer of them, the higher the multiple.
• Extend the lease. A buyer paying for goodwill needs somewhere to earn it. Exercising an option before you go to market is often the single most valuable thing you can do.
• Reduce key person risk. If the business is you, you are selling a job. Document systems, move relationships to staff, and be ready to offer a handover period.
• Get contracts in writing. Verbal supplier and customer arrangements cannot be assigned and cannot be valued.
• Tidy the register. Sort out any equipment finance, discharge stale PPSR registrations, and check the business name and trade marks are actually held by the entity that is selling.
• Deal with employee entitlements. Know the accrued annual leave and long service leave figure. It will come out of your price one way or another.

What the contract has to do for you

A seller's objective is a clean exit: paid in full, released from everything, and not still answering for the business two years later.

1. Limit the warranties. Buyers ask for broad warranties about the accuracy of everything. Negotiate a cap on liability, a time limit for claims, a minimum claim threshold, and disclosure against the warranties so anything you have told the buyer cannot later be a claim.
2. Release your personal guarantees. Landlords, financiers and suppliers do not release guarantors automatically. Make landlord release a condition of settlement and chase written releases from every supplier you ever guaranteed.
3. Agree the restraint you can live with. You will be asked for one. Make sure it does not stop you working in your industry at all, and check whether it binds your spouse or related entities.
4. Secure the money. If any of the price is deferred or paid as an earn-out, take security: a charge, a guarantee from the buyer's directors, or a retention held by a stakeholder.
5. Fix the apportionment. How the price is split between plant, stock, goodwill and the restraint affects the buyer's duty and your capital gains position. Your accountant should approve the split before you sign.
6. Control the handover. Define the training period in hours, define what happens if the buyer wants more, and end it on a date.

GST, duty and tax on a sale

A sale of a business can be GST-free as the supply of a going concern. The requirements are strict: the supply must be for consideration, the buyer must be registered or required to be registered for GST, the parties must agree in writing before the supply that it is the supply of a going concern, the seller must supply all of the things necessary for the continued operation of the business, and the seller must carry on the business until the day of the supply. Getting this wrong is expensive, because if the exemption fails, GST comes out of the price you thought you had agreed.

Transfer duty on Queensland business assets is generally the buyer's cost, but the apportionment of the price affects how much it is, which is why the buyer will care about it.

On capital gains tax, the small business CGT concessions can be very valuable, and eligibility depends on turnover, net asset value, active asset tests and how long you have held the business. That analysis belongs to your accountant, and it should happen before you sign anything, because the structure of the sale can determine whether you qualify.

The traps that cost sellers the most

In order of how often we see them.

• Signing a heads of agreement without advice. Term sheets often lock in price and exclusivity and are harder to walk back than people expect.
• Uncapped warranties. Without a cap and a time limit, you can be sued for more than you were paid, years later.
• Forgetting the guarantees. Selling the business does not release you from the lease. If the buyer defaults in year two, the landlord may come to you.
• Telling staff too early or too late. Too early and they leave, which reduces what you are selling. Too late and you have a transfer of employment problem at settlement.
• Handing over before settlement. Letting a buyer run the business before the money clears is how sellers end up with a damaged business and no price.
• Answering a due diligence question loosely. A statement made during due diligence can be a misleading representation under the Australian Consumer Law. If you do not know, say you do not know.

If a dispute does start after settlement, most sale contracts contain their own dispute clause that has to be followed first. See commercial dispute resolution.