When you decide to sell a business, you want to make the process as easy as possible. However, it often turns out to be a stressful time, as there are a lot of things to take into account.
If this is your first time selling a business, then this article is for you.
Understand what you are selling and what tax implications to expect
Understanding how tax implications differ
Depending on the type of business you are selling and how you are selling it will result in different tax consequences.
Practical example: selling a business operated through a company structure
- If you sell the assets of the business, the immediate tax impact will rest with the company (equipment, intangible items, goodwill etc.). If you then want to flow the proceeds of the sale to the shareholders, there is another taxing point that needs to be managed. Now, depending on your circumstances, there may be a way to manage these taxes in a more efficient way.
- If the business shareholders are selling their shares in the company, then the tax impact is managed at the shareholder level and dealt with by each of the shareholders. Thus, the outcome from a tax and cash flow point of view could be different.
The main conclusion here is that you should ask for a professional’s advice on the best strategy to approach when selling a business. An expert can help you understand the tax implications, but at the same time they can also recommend the best approach moving forward that will help you improve the overall financial outcome.
GST implications
GST is something you shouldn’t ignore. Establish the GST implications upfront and discuss them with the other party – this will help you assess GST costs.
If the business is being sold as a going concern (that is, “business as usual” despite the sale), then the sale is GST-free. However, for the sale to be GST-free, both parties have to agree in writing that certain conditions have been satisfied. Otherwise, you may be left with an unexpected liability from the sales process.
Liabilities
Take into account your employees, not necessarily as liabilities, but as costs to be considered. If you sell a business and not all the staff members stay with the new owners, you are responsible for employment costs and staff redundancies.
Get your house in order
This task will help you present your business in the best light to your purchasers. If you know what they will be looking for, you will be able to position your business in a comfortable light – but what this usually means is that you will have to undertake some form of due diligence on your business.
To start with, here are a few tips on what you should do:
- Clean up your balance sheet
- Sort out other parts of the business in advance of the sale
- Remove possible objections to the sale
By doing this, you improve your chances of obtaining a good sale price.
Control the flow of information
Keep in mind that not all prospective buyers are buyers; some people are just out there prospecting the market. So it’s important that you give away information about your business in a “cascade” style.
Decide which of the potential buyers are “hot leads” (more likely to buy) and which are “cold leads” (less likely to buy). Limit the amount of information you give away to limit the potential of over-sharing with competitors, even though you will be asked a myriad of information by all prospects.
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Remember that sensitive information should only be released once you both agreed on the key terms of the transaction.
Warranties and indemnities
Warranties and indemnities are created to protect the purchaser from significant changes in conditions from what has been declared. Even though the chances to trigger an event are low, it is essential that you understand what you are signing up to. Limit the dollar quantum of any indemnity and its time period.
Tip: In most contracts, if you disclose information during the due diligence phase, a warranty claim cannot be made against you – there can be an art in disclosure.
Restraints
Restraints are a common part of any business selling process. The restraint clauses prevent you from selling your business then immediately starting a new business or becoming part of a competitor’s business.
Think about what you want to do after you sell your business, and how restraints are going to impact your work in the future. It is important to learn how long the restraints will keep you “on the bench” if you plan to work in a similar business after the sale.
Do you need help selling your business?
At Shuriken, we specialise in selling and buying businesses. One of our experts is ready to support you through the process of selling your business, so contact us now for details:
