planning to sell your business

PLANNINGTO SELLYOURBUSINESS

B A K E R A F F L E C K M O F F R E Y

01.

Planning to sell your business

“A confluence of events has brought us to a time and place where owners of small tomedium enterprises need to be well organised to ensure a successful business exitstrategy.”

The GFC and property market decline combined with the imminent retirement of babyboomer (50 to 70 years old – 23% of the Australian population) means that the next fiveyears will see a huge a peak in businesses listed for sale. When compared to the numberof potential buys (35 to 50 years old – 20% of the population) this will make for anextremely competitive market place.

Whether your reason for exit is to retire or to commence on a new business venture; thefirst step is to speak to the experts. It’s time to listen to your accountant, lawyer, financierand business broker.

Every business owner should have an exit plan, and if your timing is five years or less,you need to focus on making your business attractive to the buyers’ market. The focusshould be on improving net profit and cash flow, tax planning, effective organisationalstructure, marketing plans and efficient processes that ultimately deliver growth andvalue.

Buyers in the current market are extremely savvy when it comes to figures andopportunity for growth. You will need a full set of financial reports prepared by aqualified accountant, a business plan and the ability to demonstrate the plan in action. AtBaker Affleck Moffrey we undertake business due diligences each year and are oftenastounded by the lack of structure and planning by many business owners. Poor keyperformance indicators revealed by a due diligence make it difficult to sell a business.

If you are planning to retire, consider a transition to retirement strategy which accessesthe generous tax concessions available on exit and the benefits from the use ofsuperannuation funds. Such a strategy can significantly reduce the tax payable on abusiness exit.

Another key factor is an appropriate business structure which provides flexibility indistribution of net profit, asset protection and access to tax concessions on sale. Good

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By Damien Moffrey

accounting and legal advice is required when purchasing a business to ensure the bestpossible tax outcome during both the operating phase and on sale.

Many businesses will qualify for the Capital Gains Tax (CGT) small business concessionsand this can mean that zero tax is payable on sale. You do have to meet a number ofbasic conditions to qualify for the concessions but they are tax advantageous if youqualify. The concessions which may be available are:• General 50% CGT discount;• 15 year retirement exemption;• Small business 50% reduction;• Retirement exemption; and• Replacement asset rollover relief.

The following case study illustrates the benefits of accessing the CGT concessions:

• Manufacturing business started 1 July 2004 (no cost base)• Acquired a competitor for $1,000,000 cost (all goodwill)• Business is owned in a Family Trust with a Trustee Company• Trustee Company directors and shareholders are 54 and 61 years old• Business is sold on 2 July 2015 for $6,000,000 with PP&E $500,000 WDV at date of sale

The client has the following assets and liabilities:


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• 54 year old has other income in the year of sale of $180,000• 61 year old has other income in the year of sale of $75,000• Assume that the clients have never used their lifetime caps or any other CGT caps previously

http://data.worldbank.org/indicator/NE.CON.PETC.ZS

http://data.worldbank.org/indicator/NE.CON.PETC.ZS

The Table below calculates the Net Asset Value for CGT purposes (must be less than$6,000,000):

Alternatively, the client could qualify for the CGT small business concessions if itsannual turnover was less than $2,000,000.

Option A – Small Business 50% Reduction



Option B – Use the Replacement Asset Rollover

The Small Business Rollover allows the client to defer the balance of the capital gainfor two years. To be eligible for the Small Business Rollover the tax payer must haveacquired a replacement active asset and must meet the basic conditions, ie smallbusiness test, net asset value test. The two year replacement period can be extendedif you acquire another replacement asset or make capital improvements to anexisting active asset.

As TP 1 is under 55 years of age, the trust must contribute $500,000 into TP 1’ssuperfund within seven days after you:

• Choose to disregard the capital gain (must be in writing); or• Receive the capital proceeds from the CGT event.

Option D – Use the 15-year Exemption

In this case we have assumed that:

• The business is sold on 2 July 2019• Both taxpayers are over 55 years of age and the CGT event is happening in connection with their retirement• As we do not know the tax rates for 2019/20 we have not accounted for other income of the taxpayers in this example.• If the CGT 15-year small business exemption applies, any capital gain is disregarded.• The trust make all payments to the individual CGT concession stakeholder within two years of the CGT event for it to be tax free to the individual.



Option C – Use the Retirement Rollover

The above options are a simplified example of the application of the small businessCGT concessions. This article should not be taken as personal advice as so manycriteria must be met. You should always consult a tax professional who is familiarwith the CGT concessions.

Failing to plan for a future exit may reduce the marketability of your business andresult in a higher tax bill.



If you require any further advice or clarification ofanything from this article do not hesitate to reach

out to us.

Baker Affleck Moffrey are experts in helping yourbusiness make the right planning decisions.