How to prepare for a smooth business exit
August 1, 2019
If you are planning to make a smooth exit from your business, there are many points to consider in order to reap the full value of your hard work.
Do you own a business? Then at some stage you’ll face the prospect of how to make a smooth exit from your business.
In many ways, planning an orderly sale of your business should begin on day one.
After all, what would happen if you were no longer able to operate your business due to serious illness? And how would your beneficiaries receive fair value for your business if you died? It is therefore important to have the appropriate ownership structure and legal provisions in place to ensure continuity.
But on a happier, more likely note: how can you prepare your business for sale in anticipation of a leisurely retirement or to allow you to pursue other opportunities?
This is a big topic, but here are a few factors to think about.
What are you selling?
Basically, businesses are valued on their ability to generate future cash flow. The more the cash flow and the longer it lasts, the greater the value of the business.
But what drives your cash flow? Is it a unique, high-demand product? Or the expertise of your employees?
In many service businesses the value lies in the quality of client relationships. If you are the key person in those relationships, how can you transfer client loyalty from you to a continuing employee or the new owner?
Where the value lies in the knowledge of your employees, how can you help to ensure that they will remain part of the business after its sale?
Take a step back
A business that is dependent on its owner isn’t of much value to anyone else. By slowly reducing your direct involvement in the business, and focussing on transferring relationships and expertise, you’ll be building the long-term value buyers look for.
That said, it’s not unusual for buyers to want the seller to stay around, often in a part-time capacity for some time after the sale, in order to provide an appropriate handover period.
Prepare a detailed financial report
What’s the financial state of the business? And can the reports your system generates be relied upon? Are your business processes and activities being properly captured by your accounting system, preferably using the current cloud-based packages available?
Not only will the financial reports provide key information that will help you decide on a target price for your business, the same reports will be relied upon by potential buyers to set their price expectations. Your potential buyers may, therefore, want your reports to be audited.
This seems obvious, but often a review of the business will reveal opportunities to cut expenses or generate more revenue that can lead to a sustainable increase in profit. An independent review may provide further insight.
Confirm what your business is worth
When selling your business, ensure you know it’s value. This will be a function of its profitability over recent years, place within the industry, potential for further growth and a range of other factors.
These can be evaluated and included within a formal business valuation which can inform your negotiations with potential buyers and other associated professionals.
Look out for tax concessions
The sale of your business will, hopefully, generate a substantial capital gain. A number of capital gains tax (CGT) concessions are available to small businesses that reduce CGT and boost the ‘take home’ sale proceeds.
For example, under the retirement exemption, the first $500,000 of a capital gain may be exempt from CGT.
We note this is a complicated area, subject to strict eligibility and procedural requirements. It is better to understand the impact of these provisions well before the decision to sell as it may impact the timing and other aspects of your intended sale process.
Get the experts to help
When it comes time to seriously think about the sale of your business, you’ll want to know that you are doing everything you can to realise the full value of all your hard work.
One of the most important steps is to choose an experienced firm that thoroughly understands the ins and outs of selling a business.
LDB’s breadth of knowledge and depth of experience means we are ideally placed to help with business exit planning.
To find out more call us on (03) 9875 2900 or fill out the form below to arrange a discussion with one of our business experts.