As an advisor to a diverse range of Australian businesses, I often assist people setting-up a new business. One of my first questions is what is your exit strategy? In my view, one should not enter into business unless you have some notion of how to exit with the maximum return.
A business can be risky venture. According to the Australian Bureau of Statistics, over 60 per cent of businesses cease activities within three years of start-up. Most businesses have a relatively short life cycle. Therefore, my advice is to get in, make your money, and get out with the sale proceeds.
Maximising a business sale requires advanced preparation and planning. In some cases, the preparation and planning phase may take several years. The business sale process may be broken down into four steps.
- Marketing and negotiation
- Contract and due diligence
- Settlement and exit
Following are the key steps to prepare for the sale of the business:
- Set clear parameters for the sale
- Structure review – what are the business and sale terms?
- Tax Planning – includes income tax, stamp duty and GST.
- Review of key agreements – Customer, Supplier, Lease, Finance
- Review staff structure – Does the business rely too heavily on exiting owners?
- SWOT analysis – market strengths, address weaknesses, highlight opportunities, mitigate threats.
- Results – Maximise your profit. Value is a multiple of future maintainable earnings.
- Review balance sheet items – withdraw excess cash and pay out dividend
- Conduct a test due diligence to identify any weaknesses.
2. Marketing and negotiation
There are a number of steps in the marketing and negotiation phase, following are some key actions:
- Develop a marketing strategy
- Consideration of brokers (be careful)
- Be wary of ‘tyre-kickers’ (people fishing for information and wasting your time)
- Be prepared to be agile and move quickly
- Consider a third party to handle the negotiation (owners may be too emotionally invested)
- Consider confidentiality issues
- Manage customer and market perception.
3. Contract and due diligence
Once you have reached an in principal agreement it is time to organise the contract and be ready with the information to support the business sale. The key steps include:
- Reach an in principal agreement first and then draw the contract (negotiating via contract is expensive)
- Have legal team briefed and ready to draw contracts
- Set a fixed time period for the due diligence process
- Provide and budget for the time required by personnel involved in the due diligence process
- Use technology for due diligence (data room)
- Have information ready to go.
4. Settlement and exit
Finally, you’ve done the deal and now need to transition the business to the new owner(s) in the right way, including:
- Planning for a smooth transition
- Transfer of goodwill (introductions and relationships
- Communications to customers, suppliers, staff and financiers
- Transfer of contractual arrangements
- Final taxation and compliance lodgements
- Wind-up of un-utilised business structures.
In my experience, a well planned and conducted sale process will realise a premium in proceeds. Taxation planning to structuring the deal in the right way can also lead to significant taxation savings. Utilisation of the Small Business Capital Gains Tax Concessions can often result in minimal or no income tax being levied on a sale.
To explore a suitable exit strategy for your business, contact your Bentleys advisor.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.