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Business owners are seeking exits without a plan, survey finds

Accounting firm William Buck warns most owners are “flying blind” when it comes to maximising the value of their business at the point of sale.

Small business owners are planning to sell up without having exit strategies in place, leaving them unable to maximise their business’s value or tax benefits, according to accounting firm William Buck.

The mid-tier firm’s Exit Smart Report surveyed 300 small-to-medium business owners and C-suite executives and found that just one-third of respondents had an exit strategy in place.

Despite this, the report said that “short-termism” emerged as a common theme among survey respondents, with 43 per cent of owners saying they wanted to exit in the next five years. Only 28 per cent were expected to be at the helm of their business in the next 10 years.

“Remarkably few business owners see their business as a long-term proposition,” the report said.

Looming retirement was identified as the primary trigger for 42 per cent of business owners to consider selling their ventures. They were also willing to seize opportunities for an earlier exit if they arose.

“Three out of five (62 per cent) [business owners] say they would sell their business if they received an offer, or if strong market conditions make it likely they could achieve a high value for their business,” it said.

“Of course, the likelihood of this happening varies depending on the health of the business and the economy.”

As a result, businesses needed to be “exit ready at any time”, the report said. “Business owners need to be mindful of an exit strategy – just in case an unexpected purchase offer arrives.”

One in five respondents said they would exit their business as part of their family’s succession plan.

But even for owners who expected the business to remain within the family’s control, good succession planning would ensure smooth ownership transitions and minimise the risk of disputes arising, the report said.

“In a family handover, it pays to start early to resolve any issues and ensure family harmony is maintained so that each family member is engaged, understands, and agrees on the transition process.”

The report found that two-thirds of business owners have not had their business independently valued in the last three years, and 20 per cent of business owners who wanted to sell did not know who their likely buyer would be.

“A lack of awareness on how to maximise the sale value of their entity, or even who would buy the venture, is setting up many owners for a less-than-optimal exit outcome,” the report said.

“This leaves owners flying blind as to the true worth of what is likely to be one of their most valuable investments, and commercially how a buyer would structure the purchase.”

Tax structuring was also deemed an area of “significant oversight”, with 59 per cent of respondents admitting that they had not given any thought to the tax implications of a future sale.

“A broad swathe of business owners could lose a large portion of any sale proceeds to tax in the event of a sale,” the report said. “However, it is a downside that has the potential to be structured effectively with the support of quality advice and forward planning.”

Head of corporate finance Mark Calvetti emphasised the importance of planning early to ensure the best chance of a successful sale.

“Some of the most successful exits we've seen were planned at the time of purchase,” he said.

To achieve maximum value from the sale process, Mr Calvetti recommended that business owners begun exit planning at least three to five years before they expect to exit.

“The process of selling usually takes between six to 12 months and includes planning, preparing an information document and identifying likely trade and financial buyers,” he said.

Christine Chen
30 October 2023
accountantsdaily.com.au

Completing the Sale of a Business

Selling a business involves several steps, moving parts and legal documents.

Once you negotiate and exchange a business sale agreement with the other party, parties must transition to the completion process. This broadly involves the buyer and seller’s lawyers working together (and with their respective clients) to fulfil a number of obligations. Once all parties satisfy these obligations, the sale will be complete. Completion can be a stressful and overwhelming process, so it is useful to prepare a completion checklist to keep track of progress. This article discusses the key stages and documents common to most business sale transactions.

Pre-Completion Steps

Before the parties can complete the sale, there are several steps they must take to get ready for the big day (known as completion day). Each of the buyer and seller’s lawyers must review the business sale agreement carefully to ensure their respective clients satisfy these steps. Indeed, many of them can take time and may delay the sale if left to the last minute.

The table below sets out some common pre-completion steps and the documents required to satisfy them.

Pre-Completion Steps	Description	Documents required
Corporate governance approvals	While not necessarily always found in the business sale agreement, it is important (and good corporate governance) that the entity entering into the transaction passes the necessary approvals to enter into the transaction and sale agreement. Depending on the company’s constitution and shareholders agreement, this could mean getting shareholder and board approval.	board and shareholder resolutions
Release of encumbrances	If the business owner (seller) has granted a security interest over any of the assets being sold, those security interests will need to be dealt with. This usually means having that security released by having the secured party sign a notification of discharge. However, for some assets like leased equipment, the security interest will continue with the sale and the buyer will assume liability for the security. If this is the case, the business sale agreement should address this point.	notification of discharge
Training	There are sometimes requirements for the seller to provide the buyer with training in the business prior to completion.	none
Stocktake	If stock is forming part of the business sale, there can be a requirement that the seller completes a stocktake before completion to determine the stock’s value.	none
Transferring employees	If any employees are being transferred, new employment agreements will need to be entered with those employees and the buyer, which recognise their prior service and entitlements (if relevant).	employment agreements

Conditions Precedent

Throughout the business sale agreement, there are several conditions that must be satisfied before the completion date. These are known as conditions precedent.

It is usually a term of the sale agreement that if these conditions are not satisfied by the relevant party (or waived by the party which has the benefit of them), the other party can walk away from the sale. In the case of the buyer, they can potentially have their deposit refunded.

The table below sets out some common conditions precedent in a business sale and the documents required to satisfy them.

Condition Precedent	Description	Documents required
Dealing with the lease	If a premise is subject to a lease, the landlord must consent to either the existing lease being assigned or agree to the grant of a new lease in favour of the buyer.	deed of assignment (for an assignment); or deed of termination and release and a new lease (for a grant)
Franchisor approvals	If the business being sold is a franchise, the franchisor must approve the incoming buyer and enter into a new franchise agreement with them. The seller will need to sign a deed of surrender in release in regard to its franchise agreement with the franchisor.	franchise agreement; deed of surrender and release
Key contracts	Sometimes a business being sold will be party to a key contract that a buyer will want either assigned or to have a new contract entered into with them before completion. This is because without that particular contract being on foot, the business may not be able to run.	deed of novation; or new contract

Completion Day

On the completion date, both parties must work together to fulfil their respective obligations. Completion can differ greatly between transactions depending on what the business is and what assets are being sold. However, there are some obligations that are usually present in each business sale. Once the completion obligations have been fulfilled by both parties, the sale has been completed and the buyer is now the legal owner of the business.

The table below sets out some common completion obligations in a business sale.

Completion Obligation	Description	Documents required
Deliver title documents	The seller must deliver to the buyer any certificates of title or other documents relating to proof of ownership of the assets being sold.	certificates of title
Deliver business records	The seller must deliver to the buyer any business records. Importantly the seller must only deliver the relevant business records, as there may be other records within the company not relevant to the sale.	relevant business records
Physically deliver assets	Seller must physically deliver any assets being sold that are capable of physical delivery to the buyer.	none
Other assignments	If any other contracts are being assigned as part of the sale (such as supply agreements or IP licences), these will need to be assigned at completion. If there are any vehicles, notices of disposal and any other documents required to transfer the registration.	deed of assignment or novation; notice of disposal
Business name transfer	The seller must deliver the transfer number for the business name to the buyer.	none
Login details	The seller must deliver to the buyer any login details required for the buyer to access any of the assets being transferred, which may include social media accounts, emails and CRM systems.	none
Pay the balance of the purchase price	Buyer must pay the balance of the purchase price, adjusted for any employee entitlements and stock value (if relevant). The buyer’s lawyer will prepare a settlement statement detailing how the purchase price balance has been calculated.	settlement statement

Post-Completion Obligations

Sometimes there are post-completion obligations for the seller. These often include training the buyer on the business processes for a certain period of time. It can also include an agreement to be on call for a certain period of time for technical questions and assistance following the sale. The seller will usually have restraint obligations to comply with a certain period of time post-completion.

Key Takeaways

Completion can be a daunting and stressful process, as there can be a number of steps and obligations which both parties must adhere to ensure a smooth end to the transaction. Completion involves a three-step process: pre-completion, day of completion, and post-completion. All of these steps involve different documents and requirements.

Of particular importance are the conditions precedent in the pre-completion stage, as if these are not fulfilled or waived, the other party will usually have the right to terminate the agreement and walk away from the sale. Likewise, in the case of the buyer, they can potentially have their deposit refunded. It is a good idea to keep a completion checklist handy so all parties can keep track of where things are at with completion.

Legal Vision
Thomas Linnane – Lawyer
legalvision.com.au

Scams by numbers – 2022–23 scam data is now available

Did you know that your clients aged between 35-44 are the most likely to pay money to a scammer?

Scams are becoming increasingly harder for the community to identify. The 2022–23 scam data results are now available and they reflect a shift in how Australians are responding to fake emails, SMS and social media messages.

During this period, there were 25,609 ATO impersonation scams reported, an increase of over 25%. Despite the spike in this number, there has been a 75% decrease in the amount of money paid to scammers.

Scammers are becoming increasingly interested in harvesting personally identifying information (PII) rather than requesting payments. Divulging PII continues to be a way for scammers to compromise another’s identity, leading to difficulties with lodging tax returns and myGov logins. However, we saw a 71% decrease in people providing this information.

Please encourage your clients to stay vigilant, lock down their identity information and frequently sign into their online accounts to check for unusual changes.

(NB: Stopping scammers funds is the only way to stop them and the above shows we are learning. Keep up the good work!)

Latest scam data

2022–23 Scams by numbers

Last financial year our data shows:

There were 25,609 ATO impersonation scams reported to us, an increase of over 25%.
The amount of money paid to scammers decreased by 75%.
Only 28 people paid money to a scammer, a 66% decrease.
346 people divulged personal identifying information (PII), a decrease of 71%.
There has been a significant shift in the way scammers are contacting people – Email has increased by 179% and SMS contact has increased by 414%.
The shift toward SMS and email scams has seen an increase in targeted phishing scams, leading clients to fraudulent websites. In response, we have initiated 4,836 take downs of websites with AusCERT.
35–44-year old’s are now the most likely to pay money to a scammer, this has shifted from the younger demographic of 25–34 year old’s in the previous year.
25–34-year old’s have remained the age group that divulged the most PII to scammers.

Source: ATO

Using the cents per kilometre method for claiming car expenses

The cents per kilometre method is a simple way to work out how much you can deduct for car-related work or business expenses.

Only individuals, including sole traders, or partnerships (where at least one partner is an individual) can use the cents per kilometre method. So if you operate your business through a company or trust, the business will have to use the actual costs method to claim car and vehicle running expenses.

The cents per kilometre rate takes into account all your car running expenses (including registration, fuel, servicing and insurance) and depreciation.

To work out how much you can claim, you simply multiply the total work/business kilometres you travelled by the appropriate rate. The rate for the 2022–2023 tax year is 78 c/km, and the rate for the 2023–2024 tax year is 85 c/km.

Importantly, you can’t claim more than 5,000 work/business kilometres per car, per year using this method – if you use your car for more than 5,000 kilometres a year for work or business, you need to use the logbook method to calculate your deductible car expenses.

You don’t need formal written evidence to show exactly how many kilometres you travelled, but if you use the same vehicle for both work/business and private use, you must be able to correctly identify and justify the percentage that you claim for work/business. You can’t claim a deduction for the private use. You can use a logbook or diary to record private versus work/business travel.

Travelling between your home and your place of work/business is considered private use, unless your home is considered your place of work, or you operate a home-based business, and your trip was for work/business purposes.

Acctweb

I am making a profit but where does all the cash go?

Many small business-owners experience this feeling when they look at their books. You work hard, money comes in but it all just seems to disappear. Why?

An accountant will often say this ‘problem’ is hard to explain and understand, but that the answer is usually quite simple. The following seeks to set out some of the reasons why you might be suffering from this perceived problem.

Profit versus Cash Flow

Firstly, let’s get some basics out of the way and look at what profit and cash flow actually are. It seems too many small business owners find these two confusing.

In its simplest form, profit is what is left over after subtracting your expenses from your revenue (sales). A simple Profit & Loss report in an accounting package clearly gives this information. However, comparing sales and expenses every now and again on a piece of paper can be far more confusing. Profit is usually the first number a business owner will look at to determine if all the effort they put in is worth it. It is also the number, with some adjustments, that you pay tax on.

On the other hand, cash flow refers to the balance of cash moving in and out of a business. If more cash comes in, then you have a positive cash flow and vice versa. While maybe not as eye catching as a good net profit, cash flow is just as important, if not more so. The time it takes for your clients to pay is critical to cash flow.

There may only be a subtle difference when looking at profit compared to cash flow and they can often reflect each other, but this isn’t necessarily the case and high profits don’t always produce positive cashflows. One isn’t more important than the other, but managing both well is essential to running a successful business.

Why the difference?

There are some key differences between profit and cash flow that usually explains why they aren’t the same. Here are some examples of where these two differ:

Profit is usually reported when sales and expenses are accounted for, not paid.
The accounting or tax treatment of a purchase may not reflect the cash paid for it. For example, asset purchases may be depreciated meaning only a portion of the purchase cost is deductible each year.
Timing and payment of PAYGW, super and income tax. For example, profit may be looked at every month but BAS is paid every quarter. This situation can be misleading and frustrating when decisions such as spending are made.
Borrowing for purchases may mean that an expense is claimed but the cost of it is paid off over a period of time. On the other hand, a business can claim the interest on business loans and that can be a big help.
Personal capital introduced and drawings taken out aren’t included in the profit but do impact the cash flow of the business. This is where a business owner has to be weary. Taking money out in drawings has to be controlled as it is quite easy to take too much cash out in this way, meaning business expenses can be harder to pay.

Having your business’ funds at your fingertips can make it too easy to withdraw money out at any time to meet your personal needs. While this may sound self-explanatory, many small businesses fall into this trap. To help avoid this trap:

Separate business and personal spending. Credit cards are good for this provided they are paid off in full every month.
Set up a regular transfer to a personal account for your everyday living costs.

Taxes and Super

Knowing when your tax and employee obligations are due to be paid will allow more effective planning and budgeting for your business. With the different timings of when all these payments are due, it can be easy to lose track. To assist in managing your tax and super obligations:

Set up a savings account to transfer funds into, in preparation for making these payments and lessen the blow of a big tax bill.
Try to keep track of your possible taxable income during a financial year. This will help you manage expenses and investments, as well as keep you abreast of possible tax bills you need to pay in the future.

Excessive Debtors

Slow customers payments will negatively affect your business’ cashflow. Fortunately, there are ways that this can be avoided:

If your payment terms to customers are too generous, look to reduce this period. For example, rather than allowing 30 days for payment, reduce this to 7-14 days.
Implement processes for effectively tracking and following up on outstanding debts such as monthly reconciliations or limits on accounts.
Analyse your customer payments and maintain a good ratio of good pays to bad. This way you can focus on the latter or even identify those you will cease dealing with as the risk to you is too high.

New Business and Expansion

If you are just starting a business or looking to expand, it is inevitable that you will be experiencing higher cash outgoings. This can be good in the long run but understanding and managing your cash flow during this period is extremely important.

Prepare a budget and work with it on a regular basis. Don’t go blindly into anything new.
Be careful of how much you borrow and don’t over-extend yourself whether borrowing from a bank or using personal funds. If you can’t sustain high enough sales to meet your debt obligations issues will arise.

The differences between profit and cashflow can easily be misleading when managing the operations of your business. In brief, best practise is to plan in advance for the upcoming costs and monitoring cash flow regularly.

Acctweb

Directors on the hook for cyber security, ASIC warns

Repelling attacks is just the start – businesses must demonstrate an ability to respond or the board will be held accountable, the regulator says.

Directors are duty-bound to ensure their company has “adequate” cyber security and the ability to recover from an attack or they could face action by ASIC, the chair of the regulator says.

Joe Longo said cyber readiness meant more than trying to engineer a bulletproof system but extended to building an ability to respond.

“Cyber preparedness is not simply a question of having impregnable systems. That’s not possible,” he said. “Instead, while preparedness must include security, it must also involve resilience, meaning the ability to respond and weather a significant cyber security incident.”

“This can only be built on thorough and comprehensive planning for significant cyber security incidents, and a clearly thought-out risk management strategy.”

Recovery plans on their own were also insufficient without regular testing and never-ending risk reassessment, including within supply chains.

Speaking at the Australian Financial Review Cyber Summit yesterday, Mr Longo said last year’s attacks against Optus and Medibank were a wake-up call but surveys showed most businesses lacked confidence in their organisation’s ability to remain resilient in a “worst-case” cyber event.

One important lesson was that relying on third-party providers always involved risk.

“None of us has control over the security of a third-party provider,” he said. “If we rely solely on the security measures those providers have in place, we leave a wide opening for a data breach if those measures are compromised.”

He said the Latitude Financial breach earlier this year originated from an outside provider and because Latitude was itself a service provider, millions more than its own customers were affected.

Initial findings from an ASIC survey still in progress revealed “that one of the weakest links in cyber preparedness is third-party suppliers, vendors, and managed service providers”.

Supply chain risks were a related issue, with almost one in two respondents saying they did not manage third-party or supply chain risk.

Mr Longo said ASIC had uncovered disconnects in the way various parts of a business handled the digital risks between:

Boards’ oversight of cyber risk.
Management reporting of cyber risk to boards.
Management identification and remediation of cyber risk.
Cyber risk assessments.
How cyber risk controls are implemented.

“This disconnect must be addressed,” he said. “Cyber security and resilience are not merely technical matters on the fringes of directors’ duties. ASIC expects directors to ensure their organisation’s risk management framework adequately addresses cyber security risk, and that controls are implemented to protect key assets and enhance cyber resilience.”
“Failing to do so could mean failing to meet your regulatory obligations.”

“Measures taken should be proportionate to the nature, scale and complexity of your organisation – and the criticality and sensitivity of the key assets held. This includes reassessment of cyber security risks on an ongoing basis, based on threat intelligence and vulnerability identification.”

“For all boards, cyber security and cyber resilience have got to be top priorities. “If boards do not give cyber security and cyber resilience sufficient priority, this creates a foreseeable risk of harm to the company and thereby exposes the directors to potential enforcement action by ASIC based on the directors not acting with reasonable care and diligence.”

He said boards and directors also had to consider how they would communicate with customers, regulators, and the market when things went wrong.

“Do they have a clear and comprehensive response and recovery plan? Has it been tested?

“How will the company detect if the system has been broken, or exploited? History shows that even robust defence systems can be circumvented, and resilience demands you be prepared for that possibility.”

He said two points needed to be emphasised: there was a need to act now, and third-party suppliers were a “clear vulnerability”.

“If you’re not evaluating your third-party cyber security risk, you’re deceiving yourself. And recent events show that you will suffer for it.”

“Don’t put yourself in that position.”

Philip King
19 September 2023
accountantsdaily.com.au

Australian Taxation Office (ATO) motor vehicle data matching program extended

The ATO has extended its motor vehicles data matching program for 2022–2023 to 2024–2025 financial years.

For each financial year, the ATO will acquire information from all eight of the state and territory motor registries regarding where a vehicle has been transferred or newly registered during the applicable period, and where the purchase price or market value is $10,000 or more. Records relating to approximately 1.5 million individuals will be obtained each financial year.

While the program is being used to obtain intelligence about taxpayers that buy and sell motor vehicles so the ATO can identify risks and trends of non-compliance with various tax and super obligations, the ATO will also be using the data obtained as an indicator of risk. For example, the motor vehicle data (along with other data) will be used to identify taxpayers who have purchased vehicles with values that don’t align with the income they have reported.

Other uses of the data will include identifying taxpayers who may have not met their obligations in terms of GST, FBT, luxury car tax, fuel schemes and income tax.

Acctweb

Working after pension age

The Australian Government is assisting older Australians to work, if they are able and wish to do so, by allowing them to keep more of their pension when they have income from work.

Seniors may have substantial work income from and still receive a pension (Age Pension, Disability Support Pension, or Carer Payment). For those over Age Pension age, the application of the pension income test and the Work Bonus provide an incentive to work.

A pensioner can receive an amount of private income before their pension rate starts to reduce. This is the income free area which, from 1 July 2023, is $204 for single-rate pensioners and $360 for couples (combined). For each dollar of income above the income free area, the single pension is reduced by 50 cents.

What are the standard rules?

These are the income rules for most pensioners. Read about the Work Bonus below, and how it can help you earn more income from working without reducing your pension.

Single person

Income per fortnight	Amount your pension will reduce by
Up to $204	$0
Over $204	50 cents for each dollar over $204

Couple living together or apart due to ill health

Combined income per fortnight	Amount your combined pension will reduce by
Up to $360	$0
Over $360	50 cents for each dollar over $360

Work Bonus

Under the Work Bonus, the first $300 of fortnightly income from work is not assessed as income under the pension income test. Any unused amount of the fortnightly $300 Work Bonus will accumulate in a Work Bonus income bank, up to a maximum amount.

The amount accumulated in the income bank can be used to offset future income from work that would otherwise be assessable under the pension income test. The income bank amount is not time limited; if unused it carries forward, even across years.

Note: from 1 December 2022 to 31 December 2023, a one-off, temporary credit of $4,000 applies to Work Bonus income bank balances. The maximum income bank balance also increases to $11,800 over this period. Subject to the passage of legislation, from 1 January 2024 this temporary measure will be made permanent, resulting in all new pensioners over Age Pension age receiving a one-off $4,000 credit to their Work Bonus income bank. The maximum income bank balance will also be permanently increased to $11,800.

For more information go to the Work Bonus factsheet.

ATO

There are a number of situations that will vary the above and information on these can be found using the following links, or similar.

https://www.servicesaustralia.gov.au/income-test-for-age-pension?context=22526

https://www.servicesaustralia.gov.au/income?context=22526

Working after pension age | Department of Social Services, Australian Government (dss.gov.au)

Big stamp duty and tax changes for Victoria investors and businesses.

There are three main areas of significant change:

Transition from stamp duty to annual property tax for commercial and industrial property. This will apply to commercial and industrial properties acquired on or after 1 July 2024. (existing owners of properties purchased before 1 July 2024 will not be affected).

Once a property enters the new system the annual property tax will be payable at a flat 1% of the property’s unimproved land value.stamp duty will never again be payable on a transaction relating to that property.

Covid Levy

The Victorian Government has announced a 'COVID Debt Repayment Plan' which is projected to assist in paying down $31.5 billion of COVID debt over the next 10 years.(Overall Victorian debt is around $161 billion). This plan includes the following tax increases which are expected to apply for a period of 10 years:

From 1 July 2023

An increase in the payroll tax rate by 0.5% for businesses with national payrolls over $10 million, plus an additional 0.5% for businesses with national payrolls over $100 million.

From 1 January 2024

An increase to land tax rates by 0.1% for owners holding land with a taxable value over $300,000 (if the land is not held in a trust) or $250,000 (generally if the land is held in a trust). There are also proposed additional fixed charges (of $500 for landholdings with a taxable value between $50,000 and $100,000 and $975 for landholdings with a taxable value above $100,000) and a decrease in the tax-free threshold for general (non-trust) land tax rates (from $300,000 to $50,000) which will result in significantly higher land tax assessments for investors with relatively low value landholdings (e.g. individuals and SMSFs). This also means some investors who previously paid no land tax will begin paying land tax for the first time.

Doubling of absentee owner land tax surcharge rate.

With effect from the 2024 land tax year (i.e. having regard to properties owned as at midnight on 31 December 2023), the Government proposes to increase the absentee owner surcharge land tax rate (AOS) from 2% to 4%.