Ben Wilson, Partner at CCK Lawyers, discusses the process for the sale of a family business and the key factors that should be taken into account. This article is Part 2 of 3 of a series which recaps the key points from Ben’s recent presentation for Legalwise at the Family Business Advisory Conference. Ben considered in Part 1, what you should expect during the process of a typical business sale. Part 2 will explore how to determine whether your family business is ready for sale. Next week, Part 3 will delve into how best to present the family business to potential buyers.
Are you ready for sale?
As we explored in Part 1, the sale process can be extensive. Before embarking on the sale process, you must ask yourself ‘are you ready for sale?’
Information that a buyer will need/expect
Before selling, your business records should be in order and easily accessible for the buyer. The documentation should be professional, in order and show that the business has been concerned about compliance and protecting against risks.
A buyer will likely need any information and documents that are material to the conduct of the business, relate to the profit or sales of the business or restrict the business activities. This will usually include financial statements for the past four years, tax returns and business activity statements for the past four years, cost base registers, depreciation schedules, licences and so on.
What assets are to be included/excluded from the sale
The nature of what is included in a sale is very important. It must be documented precisely and exactly. Ordinarily a sale will include:
2. plant and equipment;
4. key contracts;
5. intellectual property;
6. communication services/rights (for example, telephone numbers and email addresses);
7. property leases and equipment leases; and
8. customer deposits and work in progress.
Assets that are often excluded include debtors, cash and insurance policies. Liabilities such as trade creditors, bank loans and so on are usually excluded.
The purchase price for a business is usually calculated on a cash free, debt free basis. In the context of a share sale this means clearing/reducing the debt and cash holdings in the company before completion or adjusting for those amounts. For a business sale, the cash and debt can simply be excluded from the sale.
What is the minimum value you will accept? Understanding what you will actually receive in cash post tax
A seller needs to understand that the headline sale price is not what they will receive in ‘their pocket’. The headline sale price will be used to clear business associated debts. Also, there may be reductions in the headline sale price due to adjustments, employee termination payments and so on. Further, and most importantly, tax will have an impact such that the amount of cash received by the seller may be much less than the headline sale price.
It is necessary to consider whether the sale price is exclusive or inclusive of GST. Where possible the sale should be structured as a GST free supply of a going concern for GST purposes or a financial supply of shares.
Stamp duty is generally an issue for the buyer. That said, it is important to ensure that the relevant contractual documents reflect this.
Income tax will be payable in respect of the sale of trading stock and plant and equipment. There are often no tax discounts and concessions available for these assets, so the value attributed to them in the sale contract must be considered carefully. To take advantage of deductions and depreciation, a buyer may have a different view of the apportionment to apply to these assets.
If negotiations about the apportionment of a sale price between particular assets stall and the parties ultimately agree that the sale price will not be apportioned, each party will be left to apportion the sale price between the particular assets themselves.
Capital Gains Tax
Possibly the biggest potential impact on the headline sale price is capital gains tax (‘CGT‘). CGT applies to assets such as goodwill and intellectual property. If there are no concessions or exemptions available, then the seller will need to include in their assessable income for tax purposes the sale price less the cost base. This can have a major impact and, depending on the seller’s level of sophistication may be unexpected. It can be a major barrier to a deal proceeding.
The first exemption to consider is whether the business or any assets were acquired before 20 September 1985 (‘pre-CGT‘). If so, the goodwill of the business might be able to be considered to be fully exempt from CGT. That said, if the business was acquired pre-CGT but there have been acquisitions and major changes to the business since 1985, the nature of the goodwill will need to be considered carefully to determine whether it is fully pre-CGT. Also, if you are selling shares pre-CGT then you need to consider if the pre-CGT shares are sold but, whether 75% or more of the net value of the underlying assets are post CGT.
General 50% Discount
Another CGT concession to keep in mind is the general 50% discount. This applies where an individual or a trust (not a company) sells an asset and they have held that asset for at least 12 months. In those circumstances, only 50% of the capital gain is included in their assessable income.
Small Business Concessions
Finally, the small business CGT concessions can be very useful in the context of a sale of a family business. In order to qualify, the seller (and its connected entities and affiliates) must have net assets of less than $6M or turnover of less than $2M.
Superannuation, the family home and personal use assets such as a holiday home are excluded from the $6M.
The available small business concessions are:
1. 50% active asset discount, which further reduces the capital gain if the asset is a business asset actively used in a business;
2. 15 year exemption, which gives a full CGT exemption for assets sold which have been held for more than 15 years and which are sold in connection with retirement;
3. the retirement exemption, which exempts up to $500,000 of a capital gain if the seller is 55 years or over, or the relevant amount is contributed to superannuation; and
4. replacement asset rollover, which allows the seller to defer any remaining capital gain if they purchase a replacement business asset within the next two years.
When planning for a sale it is important to know what the overall tax impost will be, both directly from the sale itself and also from the steps required to access the funds. This will help the seller determine the timing of the sale, what the sale price will need to be and what impacts the tax will have on the seller’s retirement planning. It is critical to get detailed upfront advice about how best to structure the transaction from a tax perspective.
The text of this article is only a discussion of principles and regulations. It is not to be taken as legal, commercial or financial advice as to any factual circumstances.
Ben Wilson was admitted to practice law in 2001 and was appointed a partner in 2008. Ben is an excellent lawyer, highly regarded in tax circles and a consummate adviser on private wealth and estate planning. Ben has a wide range of experience in corporate and commercial transactions, with a particular focus on taxation and revenue. Ben has extensive experience in preparing various types of commercial contracts including business sale agreements, share purchase agreements, standard terms, partnership agreements and other documents. Ben is a member of the Law Society of South Australia and a fellow of the Tax Institute. He is a former state chair of the Tax Institute, and its South Australian Education Committee. Contact Ben at [email protected] or connect via LinkedIn.