There is often a big gulf between what you think your business is worth and the cash you end up walking away with after the business is sold.
This is partly because we as business owners see all the good points of our business, giving us an inflated view of its worth thus, when you sell your business, you get disappointed.
It is also because the tax may not be taken into account.
On top of that are loans and other liabilities that reduce the cash you walk away with.
A good place to start is to consider the minimum amount you need to get for your business.
If after this sale you plan to retire, then first you want to pay out all your debts.
Next do some sums on how much money you would need each year to live off, after you take into account the income from your existing investments.
The balance of what you need to live off will come from the sale of your business. If you multiply that amount by twenty it will give a rough guide as to what cash you will need from the sale of your business.
If you are selling, but not retiring, then the decision on a minimum amount you need from the sale will be more personal. Such factor that influences this is if you are going into another business or being debt free.
The next step is to establish what your business is worth. It is best to see your accountant to get an accurate view, as I’ve seen many erroneous ideas around. At the end of the day the value of your business will be dependent on the profit you are making.
The tax implications should be considered next.
This gets tricky as the sale price will have different components to it such as plant and equipment, stock and goodwill.
Each of these is taxed differently. In addition the goodwill component which represents the capital gains has numbers of different options for how it is taxed.
The tax you pay will also depend on the legal structure your business is in.
Getting your business in the right structure at the beginning is always wise.
However, circumstances do not always allow this to happen.
A good question to ask your accountant is – “If I sell my business am I able to get most of the money out tax free? If not, can I restructure to make this happen?”
This is even more essential if you are planning on selling your business.
Also from the sale price you need to pay out all your loans, including equipment finance.
The sale price will also be reduced by a percentage of your employee leave entitlements. If you have long serving employees this can be a sizeable amount.
Finally you need a good business broker to present your business in the best light and target the buyers that would be a good match for your business. Their fees will also need to be deducted from the after tax price.
Most of us do not sell many businesses in our life time. Getting the process and sale right is essential.