Think about selling when you buy

Contributed by Tony Rossiter, Director, HOLMANS ACCOUNTING & TAXATION – 22 January 2020

Think about selling when you buy

When selling any business, the key outcomes of a successful sale typically include achieving a quick and pain-free sale at the highest possible sale price.

Sounds easy in theory, however can be quite challenging in practice. As with most things though, by careful planning and getting the small things right and trusting in the industry professionals to guide you through the process, you will certainly improve your chances of maximising your sale outcome.

Ideally your planning for a sale should start the day you settle on purchasing your management rights. What were the things that created concerns with your purchase? Are they still an issue after you have settled? One common example is the letting agreements, issues that might have been raised with the agreements during your due diligence are still going to be there when you sell unless you take action to get them resolved. All too often the agreements end up in the bottom draw of the filing cabinet and don’t see the light of day again until your buyer is undertaking their due diligence. At that time it may be too late to rectify the issues or at best will lead to potential long delay in your sale.

Bundling for a better outcome
Another strategic decision you could make early on in your management rights journey that could pay dividends when you go to sell is the bundling of fees and charges to unit owners. Increasing in popularity over the last few years, bundling has led to successful outcomes for many management rights sales by simplifying the revenue streams of the business, improving relationships with unit owners and maximising revenue outcomes. If your management rights has not already bundled charges, talk to your industry accountant and ideally have the new system in place at least 12 months prior to going to market to sell.

Preparing a sale of business statement that will stand up to scrutiny
Against the best advice from industry professionals, management rights owners continue to prepare their own sale of business statement when they go to sell. Although this do-it-yourself approach is quite admirable and it may lead to savings in professional fees, it is also likely to increase the possibility of a sale contract falling over or a dramatically reduced sale price due to some common errors. The opportunity cost of not maximising your sale price may be many times that of the savings in professional fees.

Preparing your figures yourself or engaging an inexperienced accountant to advise on your sale purely because they are charging less can lead to the same unhappy result. Generally, the old adage ‘you get what you pay’ for couldn’t be more true.

Although not rocket science, the preparation of a sale of business statement is not entirely intuitive. Getting a single figure wrong will cast a shadow of doubt in the mind of an experienced accountant preparing the financial verification for a buyer. We see simple errors such as including 13 months-worth of one income item or making inappropriate assumptions regarding adjusted figures. These can easily lead to a terminated contract or a drastic reduction in sale price.

Minimising your tax liability
Typically a management rights owner will sell for one of two reasons, either to retire or to upsize their complex. Either way the more cash remaining after the sale process is complete, the better. Write a cheque to the tax office as a result of a capital gain on the sale of your business and you won’t see it again. Legally minimise that tax payment and you have suddenly increased that retirement nest-egg or the size of your next complex.

The greatest opportunity for minimising tax is by accessing the small business Capital Gains Tax (CGT) concessions. In practice the owner of a management rights complex can make a capital gain of $500,000 or more on the sale of goodwill and pay no tax. Although these concessions have been available for a number of years now it is amazing how few people plan to ensure they are in a position to access them.

In reality the planning for minimising tax should start before you even purchase your management rights business. Ensuring you have the most appropriate business structure from the outset will maximise your opportunity to access the small business concessions when you sell. Even if the business structure is not the most appropriate from the outset you may still be able to minimise any CGT exposure by appropriate planning in the year of sale.

The Small Business CGT concessions include a 15-year retirement concession, an active asset concession and several rollover concessions.

In addition, applying the general 50 percent discount may reduce CGT. One of the common examples of mistakes in planning for the Small Business CGT concessions include operating your management rights business through a company rather than a family trust. In a company structure you will not be able to access the 50 percent discount and the application of the active asset concession will be ineffective in minimising tax. In addition, where your management rights business is operated through a discretionary trust the Small Business CGT concessions may not be available if appropriate distributions from the trust are not made in the year the Capital Gain is realised. Finally, if applying one of the of the rollover concessions and payments aren’t made within the correct timeframe or the correct approved forms are not completed, the tax office may not allow the concession.

Recently we had occasion to advise a new client who was fortunate enough to be making a capital gain on the sale of their business in excess of $1 million. The business owners had received advice from their long-time accountant that the gain would attract a CGT liability in excess of $250,000. After some careful consideration of the relevant legislation and applying the Small Business CGT Concessions we were able to determine that the CGT liability could legally be reduced to below $50,000. Suffice is to say the client was ecstatic with the lower tax liability meaning the individual could retire comfortably today rather than face the prospect of working for several more years after paying the higher amount of tax. The moral of the story is choose your advisors carefully, saving a few dollars today in professional fees may be lost many times over in the future when you come to prepare your business for sale and ultimately calculate the CGT liability on your gain.