What a business needs before it sells

A buyer does not purchase a business. They purchase a set of numbers they believe they can defend to their board, their lender and their own accountant. Everything that makes those numbers defensible is done before the business is listed — usually two or three years before, and almost never in the six months everyone leaves for it.

The sale price gets the attention. The preparation decides whether the price survives due diligence, and how much of it the owner keeps after tax.

Structure decides what is available

The small business CGT concessions are the difference between a sale being taxed at the headline rate and a sale being taxed at a fraction of it. There are four:

• the 15-year exemption, which requires the asset to have been held for at least 15 years and, for an individual, that you are 55 or over and retiring, or permanently incapacitated;
• the 50% active asset reduction;
• the retirement exemption;
• the small business roll-over.

All four require the basic eligibility conditions to be met first: an eligible entity (a small business entity with aggregated turnover under $2 million, or meeting the maximum net asset value test, or the equivalent for a partner or a passively-held asset), and an active asset — one used in the business. Share sales carry additional conditions on top.

Two things follow from that. First, whether the business is held by a company, a trust or an individual changes which concessions are reachable and how they flow to the owner’s own hands. Second, the ATO prescribes an order for applying the small business concessions, capital losses and the CGT discount — so the sequencing is not a matter of preference. Restructuring in the year of sale is possible but constrained, and it is always more expensive than restructuring three years earlier.

If the plan is to sell, the structure question should be settled while there is still time to move assets without triggering the very gain you are trying to protect.

The numbers have to close, repeatedly

Due diligence is not a negotiation. It is a reconstruction: the buyer’s accountant takes your figures, strips out the adjustments, and rebuilds the earnings. What they are testing is whether the numbers hold when someone else does the arithmetic.

• The ledger reconciles, every month, for three years. Not “roughly”, and not only at year end. A business that cannot close its own accounts monthly reads as a control problem, and control problems are priced.
• Every add-back is evidenced. Owner’s salary, personal vehicles, discretionary expenses, one-off costs — each one needs a document behind it, not an explanation.
• Related-party arrangements are on commercial terms. Rent to the family trust needs a lease at market rent. A loan from a shareholder needs a complying agreement. These are the first things a buyer’s adviser asks for and the last things most businesses can produce.
• Customer concentration is disclosed, not discovered. If one customer is 40% of revenue, the buyer will find out. It is worth paying for a contract with a term, or a genuine second channel, before the sale rather than conceding it in the price.

Contracts and people

The unglamorous files that decide whether the business can be handed over: customer contracts with change-of-control clauses, supplier agreements, leases with options, employment agreements and restraints, IP registrations, insurance, and a clean WHS record. Buyers pay for a business that can be transferred, not one that depends on the founder’s relationships and a handshake.

The decision most owners get wrong

The instinct is to wait for one more good year. Sometimes that is right. But the concessions, the structure, the 15-year clock and the quality of the records all reward time, and the market rewards a business that does not need to be sold. Those two incentives point in the same direction: start two years earlier than feels necessary, and sell from a position where you can decline the first offer.

What we do in the years before

A sale readiness review: structure, concessions eligibility, the last three years of accounts, related-party agreements, and the list of things a buyer’s adviser will ask for. Then a plan with dates on it. It is cheaper than a discount negotiated under pressure, and considerably cheaper than a concession lost because an asset was held in the wrong entity for fourteen of the fifteen years.

Sources: Australian Taxation Office, CGT concessions eligibility overview. General information only — not advice for your circumstances.