Before you make the decision to sell your business, you need to know how to avoid making the most common mistakes. 

Before you make the decision to sell your business, you need to know how to avoid making the most common mistakes. A little thoughtful preparation can save you time and money and help you avoid making decisions you might regret later.

For some people, going through the process of really thinking about what they are selling has led them to reconsider and make other adjustments in their business instead.

1. Not knowing what you want to sell

It sounds like common sense, doesn’t it? “I know what I want, I want to sell my business!”

But what does that look like?

We have worked with a few clients lately at different ends of the spectrum of preparation for sale. Some people know exactly what they are selling, have identified the assets to be sold and those not transferring with the sale, and know how much they want for it. They know whether the premises are part of it and what it looks like to transfer the premises.

Surprisingly, other people come to us to prepare contracts for sale, and we spend weeks trying to get clarity on what is included, what is not included, and what is actually necessary to ensure that the sale is made as a going concern and will therefore not attract GST.

And yes, if you didn’t get around to documenting a business sale when it occurred and would like it documented after the fact, that is still possible. Although it has its own peculiarities. 

The Australian Taxation Office (ATO) guidelines for sale of a going concern are straightforward:

• everything necessary to continue to operate the business, including staff, equipment and premises
• continue to operate the business up until the sale date
• buyer must be registered for GST
• there is a written agreement showing that ‘going concern’ has been agreed between the parties, dated before the sale is finalised
• both parties are to be a single purchasing entity and a single selling entity to claim the GST exemption – there can be multiple enterprises but these have to operate as separate sales (ie. land and business)

To be a sale of a going concern you need to transfer everything that is necessary to the ongoing operations of the business. This still occurs in context. You might use certain software in your business (like Xero or MYOB) and consider that essential, but the buyer might have different software and no intent of changing. What is essential for the business is the customer and sales data, not necessarily the software.

Prudent buyers will complete searches and due diligence before offering to purchase your business. Ideally, you will have anticipated and prepared all the information the buyer might want to see before promoting your business for sale; this makes the due diligence process much smoother and quicker.

Apart from knowing what it is you want to sell and what you want for it, it is also important to consider whether it is important to you, or the continuation of the business, to sell the company or the assets.

Obviously, if you are operating through a trust, it is an asset sale, but if you are operating through a company, there may be an option to sell the shares in that company. Lots of advisers will caution against purchasing shares because more due diligence is involved, and you may not be able to discover any skeletons in the company closet until after the transfer is complete. Yes, we can write in indemnities etc., but it is considered a higher risk position that purchasing assets. 

However, there are regulated businesses where it may be much easier to transfer the company than attempt to transfer assets. For example, selling a business with government contracts, selling a business which has licenses or permissions that require an involved process, such as an RTO (Registered Training Organisation) if you are looking for potential buyers who do not already have that compliance set up.

2. Not getting advice early, whether legal, financial or from a business broker

Working with a business broker can help you identify what you are selling and the value of what you have to sell, before you go to market. Some business brokers are great, will work closely with you to achieve what you want and really look after your interests. Some aren’t.

We’ve worked with business brokers in the past who are so focused on getting their commission that they write the sales contract in favour of the buyer, and insist on controlling the contract contrary to any legal advice to the parties. This is where it helps if you understand what you are selling and what you want to achieve. You’re not likely to be persuaded to just take any sale.

Sellers don’t always consider planning for life after the sale of business (apart from much needed holidays) and may struggle to ensure they have adequately provided for their next venture, or even retirement. You want to be better off financially at the completion of the sale, instead of regretting your decision.

Achieving the best possible price means that careful planning needs to be in place; a quick sale due to financial pressure or personal reasons is can potentially impact your ability to achieve the best price for your business.

You can put processes in place to limit your risk and protect your interests. You can put boundaries around what you are prepared to commit as part of the sale in terms of your assistance to the buyer after settlement.

If you get appropriate advice before you sign anything, you have the opportunity to walk away from a transaction that is only going to cause you grief in the future.

I would add addressing PPSR’s, as they tend to get overlooked and can cause a big problem with completion. The main issue I have found is that most sellers do not have a comprehensive exit plan that details every step, especially the preparation stages that will make the process more seamless. 

Another process which is becoming more popular is to engage a registered business valuer, or other expert to complete a pre-sale audit report that that will highlight the true strengths, weaknesses, opportunities and threats confronting the business. 

Hugo Martin, Business Broker and Registered Business Valuer 

Getting appropriate tax advice

It is essential to consult with a tax professional to make sure you understand that tax implications of your sale and the amount of tax liability you will have to pay. GST, CGT and income tax may all need consideration depending on what you are selling, when and in what structure.

We are not tax lawyers, and you will need to consult your tax adviser for advice appropriate to your circumstances.

Ideally you will have your financial reporting for the past 2-3 years available for inspection by the buyer (after they have signed an NDA) and a business structure that is attractive to a potential purchaser. As part of the business purchase, the buyer will want to review the financial records of the business, because this supports the price you are asking the buyer to pay.

Another consideration will be the way the selling price is determined and if the future performance of the business will generate a percentage to be paid to you as the seller.

Stamp duty

Depending on which state or territory you are located, and where the buyer is, there may be transfer duty or stamp duty on the sale of the business.

Duty is usually calculated on the arm’s length value of the business sale. So, if you transfer the business to a friend or relative at a discount, you may need to submit an independent valuation with the application for assessment.

Depending on the value, nature and place of business, an item like goodwill can still attract transfer duty. The sale of goodwill alone does not always attract stamp duty, but that type of sale is also not likely to be a sale of a going concern. Lots of different things need to be taken into consideration.

Case Study

An example of where goodwill was found not to be included in a sale was a case involving the sale of two McDonald’s restaurants in NSW. The Chief Commissioner for Taxation assessed stamp duty on the sale price and included an element for goodwill. The restaurant owner argued that the goodwill was not sold and instead remained the property of McDonald’s due to their licence agreement. The Court held that any goodwill the restaurant owner enjoyed would be terminated at the end of the licence agreement. In those circumstances it was determined that no goodwill was transferred, and no duty was payable by the restaurant owner in respect of goodwill.

3. Not understanding the ownership of the assets in the business sale

A little careful pre-planning for sale will ensure that the correct assets are in the correct business entity name and will attach to the sale.

We’ve had interesting situations in the past where clients have, at the last minute and only after we’ve reviewed a contract from the potential buyer (it’s not always the seller who prepares the contract, although that is a good idea) that it was discovered some of the assets sat in a forgotten entity that was about to be deregistered by ASIC. The company was quickly reinstated and added to the sale contract as one of the sellers.

In that instance it was a trade mark registration, but it could just as easily have been a motor vehicle, manufacturing machinery or office equipment.

To help you think about your business, the assets of the business are defined in the Real Estate Institute of Queensland (REIQ) Business Sale Contract, under Clause 3.1 to include the following:

• Goodwill
• Fixtures
• Fittings
• Furniture
• Chattels
• Plant and equipment
• Industrial and intellectual property
• Work-in-progress
• Stock in trade
• Permits
• Licenses
• Any other assets listed by the parties

There are usually warranties in the contract for sale of business that you as a seller give, promising that the assets are ‘unencumbered’ or not subject to the interests of another party, like a financier.

It will be a necessary part of the sale to provide clear title for the assets, including paying out any lenders who hold the existing loans and securities registered under the Personal Property Securities Register (PPSR). If this does not happen before or at settlement, then if the buyer defaults on the payments, the financier can repossess the asset.

4. Not understanding what is going to happen with your employees

Do you tell them, or don’t you? And when?

If you are about to list your business with a broker, then it’s a good idea to have a discussion with your staff beforehand. You don’t want to embarrass your employees by having them find out from someone else that their job might be at risk.

Some buyers will be interested in all your staff. Some buyers may be interested in some of your staff and some buyers just want the assets and don’t want any people. The size of your business, and the size of the purchaser, are likely to make a difference.

If you are listing with a broker, you can let the broker know what your expectations are around your staff – that they buyer will take them, or the majority of them.

It is the option of the purchaser to make your employees an offer, or not. You can’t force a new owner to take all your employees. You also can’t force your employees to work for a new owner. Some careful negotiation may be needed.

As a seller, you will be under an obligation to give all the employee details for transferring employees, their entitlements, any accrued leave and the pay rates and any Awards they might be employed under.

If the purchaser does not take your employees, then you will need to pay out their entitlements, which may include accrued bonuses, annual leave, long service leave, notice or redundancy. If you are thinking ahead and have a year or so before you expect to put your business up for sale, you might consider reviewing what entitlements have been accrued and suggesting some people use their leave.

Once offers and agreements with the employees have been made by the buyer, there is likely to be an adjustment to the purchase price for some entitlements, such as personal leave, annual leave, long service leave and accrued bonuses.  

If you need advice on understanding what is going to happen and what your responsibilities will be, and even answering your employee’s questions, then let us know and we are happy to help.

5. Not thinking about what you will do with the premises if not part of the sale

Not every business requires an office and with the changes in working habits brought about by COVID, a buyer may not be interested in taking over any premises you have for your business. So where does that leave you?

If the buyer does want your premises:

• If you lease the premises, then you will need the landlord’s consent to a novation or assignment of the lease. A novation gets you out of any liability associated with the lease and an assignment means you are still on the hook (financially liable) until the lease ends, which may include option periods.
• If you own the premises, you may be able to negotiate a sale in conjunction with the sale of business.
• If you own the premises, you may be able to negotiate a lease with the new business owner, and yes, the lease still needs to be documented separately from the sale of business.

Most landlords are prepared to agree to an assignment but not a novation. Why not have two people responsible for covering the lease when you have no obligation to let the first tenant out?

If the buyer doesn’t want your premises:

• Think about how much time you have left on the lease.
• Think about alternate uses for the premises.
• Consider whether you still have a use for the premises, or if you need to break the lease.
• Instead of breaking the lease, you may be able to find someone else to take over the lease – again by novation or assignment, or you may be able to find someone to sublet some of the space from you to reduce your costs.

It is not uncommon for a business to ‘hold over’ after the end of a lease on a month-by-month tenancy pending a sale of business to limit the risk of having to maintain a lease without a business to fund it. We’re happy to talk through your options with you.

6. Forgetting to transfer licenses, permists and social media accounts

Some businesses need specific licences and permits to trade.

Think about:

• food business licences
• liquor licences
• building trade licences
• transport licences
• commercial parking permits
• and so on

The buyer’s expectation will be that the business sale contract includes at least reference to necessary llicences and permits, and possibly your cooperation in transfer, if that is available. Some permits require a new application from the buyer and that takes time. The buyer might ask you to stay in the business as the licence holder pending their application. If so, you will need to think about your risks if their application is unsuccessful. It is possible that the sale will fall over if the purchaser cannot get the necessary permits or licenses.

Online assets

Business brokers don’t always consider your online assets when helping you prepare for sale. In our online world where people increasingly search online to find what they are looking for, online assets can have a significant impact on the continued operation of the business.

Whatever you use to promote your business online is your intellectual property and needs to be part of the sale.

Your domain name, business website (a domain name and website are different things) and social media accounts will also need to be transferred across to the new owner. Different platforms have different requirements and its important you understand what you have to do when settlement comes around.