Selling your business

There are many factors to consider when selling your business, one of the most important being how much you would like to sell your business for?

Selling your business can be a challenging task, so it's important to get it right. Here are some steps to guide you through the process.
  • Decide whether to use professionals

    If you can afford to, consider using a reputable business broker or other professionals to help you sell your business, because the process can be time consuming and complicated.
     
    Business brokers are professionals who specialise in buying and selling businesses. They can help you understand legal and government requirements and make the process of selling your business less stressful. The services of a broker may also not be as expensive as you think. Find out more from the Australian Institute of Business Brokers.
     
    As you'll need to provide your broker or other professionals with quite a lot of information about your business, make sure you check the professional's credentials to ensure they're reputable before using their services.
  • Choose your valuation method

    There is no one set method to value your business. A combination of methods can be used to arrive at your desired sale value. Below are some common methods of working out the value of a business.
     
    Use the current marketplace value and your industry
     
    How you value your business can depend heavily on the industry you're in, and the current marketplace value of similar businesses within that industry.
     
    Industries usually come up with their own rules and formulas to value a business, so it's a good idea to conduct research to gain a good understanding of your industry before you sell your business.
     
    The Australian Bureau of Statistics website contains a range of statistical data grouped by industry.
     
    Use the return on investment method to calculate value
     
    For example, you have a selling price of $200,000 in mind, but want to test your return on investment (ROI) based on that price. You calculate that your business' net profit was $50,000 for the past year.
     
    To work out the ROI, you use the formula:
     
    ROI = (net annual profit / selling price) x 100
     
           = (50,000/200,000) x 100
     
    In this case, your ROI is 25%.
     
    If you have an ROI in mind, you can use it to calculate the price for your business:
     
    Selling price = (net annual profit / ROI) x 100
     
    For example, if you were looking for a ROI of at least 50% for the sale of your business, and your business' net profit for the past year was $100,000, you can work out the minimum selling price you should set.
     
    Selling price = (100,000/50) x 100
     
    In this case, to achieve a ROI of at least 50%, you'll need to sell your business for at least $200,000.
     
    Use your business' assets to calculate value

    When calculating your business' asset value, it's important to include both tangible and intangible assets of your business. Tangible assets are physical things you can touch such as tools, equipment, and property. Intangible assets are things that can't be touched but are still valuable such as intellectual property, brands and business goodwill.
     
    After you've calculated the total asset value of your business, you can then use this value as an indication for how much you would like to sell your business for.
     
    As assessing your business' assets value can be a complicated process, it's a good idea to talk to your business advisor or accountant for help.
     
    Business goodwill
     
    Business goodwill is an asset that is much harder to value, as it does not have a determined market price. Goodwill can include:
    • customer loyalty and relations
    • brand recognition
    • staff performance
    • customer lists
    • reputation of your business
    • business operation procedures.
     
    Calculating goodwill can be a complicated process, and different methods will give you different results. Using different methods of calculation can give you an indication of the price range you would like to set for your business goodwill, and ultimately the value is what the marketplace or buyer is willing to pay.
     
    Because it's difficult to calculate goodwill, it's a good idea consult a professional such as your accountant.
     
    Business depreciation
     
    If you use your business assets to calculate value, remember to take depreciation into account. Depreciation is the loss of value for your assets over time. For example, you may have purchased a computer for your business three years ago for $1,000. When calculating your business' asset value, the value of the computer will no longer be $1,000.
     
    Talk to your accountant if you're unsure about how to work out depreciation of your business assets.
     
    Estimate the future profit of your business
     
    For a buyer, the biggest value of your business will come from future profits generated. As a seller, you're more likely to sell at a higher price if you can show through your financial statements that your business is likely to be profitable in the future. This helps give a prospective buyer an idea of the returns they may expect from your business in the future.
     
    You can estimate the future profit of your business by looking at any trends in your business finances from past years. You can also investigate the trends of similar businesses in your industry to see how your business compares and how the market is going. This information may be useful when negotiating the final selling price of your business.
  • Prepare your business information

    You’ll need a range of business information to value your business properly. If you need help with preparing your documents and can’t afford a professional, consider asking friends or family with bookkeeping or business experience. Below is a guide to the type of information you’ll need.
     
    Finances and assets
     
    • Your financial statements (for the last 5 years if possible) – such as cash flow statements, debts, annual turnover, and profit and loss statements
    • Details of physical assets such as machinery, buildings, equipment, and stock
    • Details of other assets such as goodwill towards the business and intellectual property (any designs or ideas that you have protected through copyright).
     
    Legal information
     
    • Legal documents such as leases and insurance policies
    • Registration papers such as business name certificates, Australian Business Number (ABN) registration papers, licenses, permits, and any other papers that demonstrate you comply with government requirements.
     
    Business profile, procedures and plans
     
    • Market conditions such as details of competitors, and how your business compares to them
    • Sales information such as reports and forecasts
    • Business history such as start date, ownership changes, and location changes
    • Business procedure documentation such as marketing, staff roster and customer service procedures
    • Business plans such as marketing, emergency management and growth plans
    • Other details such as opening hours and whether the business premises are owned or leased.
     
    Staff, supplier and customer information
     
    • Employee details such as job descriptions, skills and experience, work history, performance reviews, and pay rates
    • Supplier details such as supply agreements and supply prices
    • Customer details such as customer numbers, customer profiles and marketing activities.
  • Find buyers for your business

    The way you advertise will depend on your business type, industry and contacts. You can advertise the sale of your business to potential buyers through several methods, including:
     
    • business brokers or real estate agents advertising online
    • your existing networks (e.g. family, friends, or employees)
    • advertising in the newspaper
    • advertising in trade publications or using your industry contacts
    • word of mouth
    • notifying customers of your sale (if you're confident it won't harm your business if your customers know you're looking to sell).
  • Negotiate the sale

    When negotiating the sale, make sure the information you give about your business is accurate and true. If you say anything or provide information that is later found to be untrue, it may be considered misleading or deceptive behaviour.
     
    You’ll need to agree with the buyer on a range of things, including:
    • the sale price
    • the deposit amount (usually 10% of the sale price)
    • the settlement period
    • handover training (if any) for the buyer
    • arrangements for existing staff.
    You may need to compromise on some things to get the best outcome. For example, if you’re keen to settle quickly, you could encourage the buyer to agree to this by offering a lower sale price.
  • Prepare the contract

    Generally, an intermediary draws up the sale contract. Most small business owners will ask a solicitor to review the contract, and the contract will also be checked by the buyer’s solicitor.
     
    Solicitors should check that the contract doesn’t include any false statements, and covers all aspects of the sale, including:
     
    • all the relevant assets that are being transferred, including property, equipment, fixtures, fittings, stock, and any rights to use any names
    • all the relevant liabilities, including creditors (people or businesses that your business owes money to) and the lease of the business premises
    • responsibility for employees and employee entitlements, including whether employees are to be transferred with the sale (if the new owner isn't an 'associated entity' - related to the old business in some way - they don't have to recognise some entitlements)
    • statements about what will happen if any issues arise (for example, the buyer decides not to proceed, inaccuracies are discovered in the contract, etc)
    • any restrictions on trading in your profession or industry after the sale (to prevent you from competing directly against the new owner).
  • Take care of your employees

    When you sell your business, your employees may either:
    • transfer with the business to the new owner, or
    • end employment with the business.
     
    It's important to communicate with your employees and let them know whether they'll be transferring across to the new owner or ending their employment due to the sale of the business.
     
    In both cases, a transfer of business ends an employee’s position with you, the former employer, so you must give your employees notice of ending employment or provide payment in lieu of notice.
     
    When employees transfer with the business, you'll need to give all relevant employee information to the new owner. There are some employee entitlements that the new owner must recognise and others that the new owner doesn’t have to recognise.
     
    Check out the Fair Work Ombudsman's website for an overview of what happens when businesses change owners.
  • Deal with legal matters and tax implications of the sale

    Consider any insurance requirements for your business, such as run-off cover (where you are insured for any legal claims that are made after you sell your business).
     
    Also consider whether Capital Gains Tax (CGT) and Goods & Services Tax (GST) applies to the sale of your business. For example, if your business is registered for GST, you may need to include GST in the price of individual business assets or repay GST credits.
     
    If you are selling a small business, CGT concessions may be available.
     
    If you cannot pay your taxes on time, you may be able to get help through an ATO payment plan.
     
    Find out more about taxes when selling your business on the ATO website.
  • Transfer your business to the new owner

    Once your business is sold and will no longer be part of it, you'll need to:
    • cancel your Australian Business Number (ABN) and make sure you've met all your reporting and payment obligations first
    • either:
    • cancel other tax registrations, such as Goods and Services Tax (GST)
    • lodge any final tax returns
    • pay any outstanding activity statements and instalment notices
    • make GST adjustments on your final activity statements
    • pay any outstanding bills, such as water and electricity
    • transfer any other assets, such as domain names or web registration, to the new owner
    • transfer any business records, customer records and employee records to the new owner
    • transferring leases, licenses and permits to the new business owner at the same time your business is transferred as:
      • you're still responsible for any lease agreements and obligations for your business until they are transferred to the new owner
      • different leases can have varying conditions when it comes to transfer of ownership, so make sure you understand the conditions of your lease agreements before you transfer them to the new owner
      • keep in mind that transferring licenses can take a long time (sometimes up to 12 months), so it’s important to plan for this early in the process.
  • Look after yourself

    Selling your business can be an emotional time. After all, you’ve probably put in countless hours, money and energy.
     
    It’s important to know that there is assistance available. These include:
    • financial advice through the MoneySmart website, to help you take care of yourself financially
    • career advice through the myfuture website if you're looking for a new career direction
    • employment assistance through Australian JobSearch, if you're looking to find a job
    • employment and financial assistance through the Department of Human Services.

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