Succession - Looking Ahead

In most cases, value is dependent on future maintainable profits and the risk level of your industry and business type.

To work it out, you need to look at the profitability of your business then consider the expenses included in the profit and loss that would not be applicable to a new owner. This adjusted profit can then help determine the goodwill value.

Add to this any tangible assets e.g. bank account, debtors, vehicles and equipment then deduct any liabilities payable by the new owner e.g. creditors, employee leave entitlement etc. The net result of this, added to the goodwill value, would give you your fair value price.

You can maximise the future value of your business by doing everything you can to ensure  the future maintainable profit of the business i.e. it’s potential to keep making money. You should do this prior to selling a business.

In addition, you need to do what you can to make sure your business is not dependent on you. For example, by enabling operations to run smoothly when you exit and ensuring clients will not leave when you do. You also need to ensure that your business is not high risk and therefore worth the investment.

When you sell your business, you may be liable to pay capital gains tax on any capital gain made. There are a number of ways you can minimise your potential capital gains.

You may have an option to restructure your business now to assist in reduced capital gains. You can also look at where your capital gains will eventually be held and whether that entity results in reduced capital gains tax. 

In addition, look at the timing of the sale of your business to minimise any taxation through planning of the eventual sale.

The options you don’t really want to take include walking away from it, gifting it to someone or being faced with an unplanned event. The best option is to sell.

This could be an outright sale, a merge where you receive the balance over time, a partial sale or a sale with vendor finance attached. Ideally, you want to sell to someone who sees real value in your business, for example family members, competitors, suppliers or employees.

You may not think you need to start planning for business exit until it’s just around the corner. However, to ensure you cover all your bases and get the maximum return for all your hard work over the years, we recommend you start planning at least three if not five years before you intend to actually sell.

Financially, consider how much you will get from your business, how you will receive it and what your obligations will be. In addition, think about what you’re going to do with it and how that fits into your retirement plans and how you want to live.

Mentally, make sure you have plans in place to keep you busy. This could include charity work, other business ventures or perhaps being a grandparent so you don’t lose your sense of purpose or self.

To calculate your estate you need to look at all of your assets and liabilities that are held in your name alone. This includes everything from your home and business to your life insurances and possessions. Be sure to take into account any costs associated with the sale of these assets. For example, would you have a capital gains or selling cost liability?

While technically not part of your estate, you should also take into account things like superannuation and trusts and ensure plans exist for these assets to end up where you want them.

It’s important you consider what would happen to your estate in the event of your death. This includes ensuring that the transfer of ownership of assets is efficient, for example that your estate is not being unfairly taxed.

A common strategy is the use of testamentary trusts where your beneficiaries can benefit from asset protection and reduced tax, if structured correctly.