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Plan for selling well in advance
Plan for selling well in advance

Planning for the biggest sale

The decision to sell a business requires care and consideration. David Brown says only by considering the effects of business practices upon financials well in advance can owners assure a maximised sale price.

You’re working in your business with no plans to retire. You might even believe it is too early to plan your retirement, let alone discuss it, but at some point you will want to pass the reins to someone else – let’s be realistic. No one lasts forever!

The right time to start planning this is not just before selling up. Any owners looking to vacate a business must begin the process of handing over the business or setting up the sale quite a few years before they actually intend to leave.

As far as possible, businesses should really be kept in a ready-to-sell mode at all times – no one ever knows what circumstances could force them to put their stores on the market in the future.

Most owners want to exit the business almost as soon as they decide to sell. Once the decision is made, there is a mental change that makes it difficult to continue giving 100 per cent to the cause. It often doesn’t take long from the moment the decision is made to start seeing a decline in sales and performance in a business, which is definitely something that needs to
be avoided.

In reality, it takes a while to find a buyer even for a well-groomed business so one can only imagine how long it would take for a business that is not well-groomed! Then there are unforeseen circumstances to be taken into account. Prospective buyers expect at least three years of financials – it’s difficult to improve financial results after the event has happened!

The big question is when is a business considered ready to sell? It is common to get a little laidback when a business is doing well but this is the time when owners need to be especially vigilant on controlling their financials.

The following outlines four important areas that require attention while grooming any business for sale.

Reduce stock to appropriate levels
What does “appropriate” even mean? This refers to the level of stock that is actually needed to run the business as opposed to what stock the business actually has.

Chances are the store is reasonably overstocked and all sorts of costs are associated with overstocking, such as staff time, costs in handling and debt servicing. A redundant item of stock costs more than people think – $100,000 in surplus product can increase a business’ costs manifold so stock needs to be under control to assist any business’ financials.

Deposit all takings in the bank
Plenty of business owners are doing this already but there are those who aren’t. The latter owners pocket a little cash before depositing their takings, assuming that the only drawback to this is the risk of falling foul of the ATO; however, this is not the only problem. For every $1 pocketed, a store’s profit is reduced by $1.

It’s common to sell a business for around four times the profit, which means every $1 taken out of the takings will cost the business $4 at sale time.

An owner who takes $10,000 out of the business in the span of one year is effectively taking $40,000 off the potential sale price. Talk about short-term gain, long-term pain! 

It’s no use telling the buyer that they add it back as only what is seen can be believed. Their financial advisors will ignore any unreported claims of income.

Analyse all overheads
Is the business incurring unwanted costs? It is quite legitimate to pad out some personal expenses through the accounts but if a store shows high expenses in the accounts for things that really aren’t important to the business, this will also affect the sale price by reflecting that the business isn’t as sound as the owner professes.

To make the business appear successful enough for sale, this is not the type of tax minimisation activity an owner should be undertaking.

Plan tax with a sale in mind
Sometimes the best decisions to minimise tax are not necessarily the best in terms of how the financial accounts appear.

Bringing forward expenses or increasing the claim on depreciation are both examples of costs that can help minimise tax but may impact negatively on the business’ profit.

If a business sale is on the horizon, definitely discuss with an advisor how this affects the company’s tax position.

The above are a few guidelines to consider if planning the sale of any business. It is highly recommended to take the advice of a financial advisor or accountant before proceeding any further with this.

David Brown

Contributor • Retail Edge Consultants

David Brown is co-founder and business mentor with Retail Edge Consultants. Learn more: retailedgeconsultants.com

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