Do you have a succession plan for your business?

A recent study has revealed that whilst 57% of business owners are expected to retire within 10 years, 68% have not thought about who will either (a) run their existing business or (b) purchase it from them. So it follows that there will be an enormous number of businesses for sale within the next 5-10 years.  Alarmingly, less than 20% of these businesses will have a succession plan in place when it comes time!

A key driver in establishing the VALUE of your business revolves around having a succession plan.  Therefore, if you are planning to sell, this is definitely the major issue that you need to consider. Logically, it follows that businesses with a defined and well thought-out succession plan that’s already been implemented or ready to be implemented, will be worth more than those businesses without.

If you are not planning to sell but would like to be less 'hands on' in your business and enjoy your lifestyle NOW – you must have a succession plan in place.

In practical terms, an exit by you or one of your partners is inevitable – the law of averages means that sooner or later someone will want to or have to leave the business.  These reasons could include retirement, a disagreement or even a family law matter that results in a financial settlement.  And of course, worse still, what if a departure is forced on someone due to death or illness? And so the question - if you or one of your partners in your business is either forced to exit or they decide the time has come for them to leave - what happens then?

Call us on (03) 9622 0600 to discuss how to put the necessary plans in place so that you don’t get caught-short.

How much is your business worth?

As a small business owner, your business is likely to be your biggest asset. How do you work out how much your business is worth?

Most business owners want to know what their business is worth, whether or not they are looking at selling. For some business owners who are  relying on the business to fund their retirement, it's important to know what sort of price and worth the business has.

When selling a business, the first question is - What are you selling?

Most of the time, this is the fixtures and fittings, plant and  equipment, stock on hand, and the goodwill of the business. Buyers do not generally want to take on your liabilities or collect any outstanding payments. Most business sales are sales of business assets.

With the exception of goodwill, the business assets are easy to value. The value of plant, equipment and stock on hand are generally easily agreed on. The difficulty in valuing all assets is putting a price on goodwill. This is because goodwill is made up of things that are usually intangible, such as:
 - the business name
 - the customer list
 - the income stream generated by the business
 - the location and lease on premises
 - the brand value
 - franchise or distribution rights
 - existing operating systems
 - advertising
 - supply agreements.

No one would argue that there is not value in that list, but how much?  

Goodwill is the value of the future free cash flow of the business. Based on how your business is structured, it is the value of the profits the business can generate in the future. This is what the buyer is prepared to pay for - reasonable certainty of profits and free cash flow. A start up business would have a higher level of risk and no certainty that profits can be generated. Goodwill is what you are prepared to pay to avoid the risk and uncertainty over profits.

So, what influences business value and what will people pay for?
1.    A history of profits, profits, and more profits
2.    Returns on capital invested better than 30%
3.    Strong growth and growth prospects
4.    Brand name and value
5.    A business not dependent on the owners
6.    A strong customer list
7.    Monopoly income – exclusive territories
8.    A sustainable competitive advantage
9.    Good systems and procedures

It is possible to get a much higher than normal price for your business, but it needs to be a unique business or have some unique feature. If you've created and nurtured your business into something special then a price beyond the norm may be achievable.

It's important, though, to realise that it is the market that sets the price. Having said this, keep in mind who your purchaser might be. There might be someone out there willing to pay a big premium for your business.

Even if you're not considering selling your business at the moment, you will be one day, so it's good to consider what you can do to grow your business into something unique, or increase its value from year to year. If possible, you should consider what you'll need to do to sell your business three to five years before you actually intend to sell. Most purchases are looking for a history of trends, so the more prepared you are and the more consistent your business performance is, the better your business will appear to future buyers. Improvement changes shown over a sustained period looks far more impressive than improved performance over only one year.

If you want to find out more about how to prepare your business for sale, or would like to know how much your business is worth, talk to us today.

Investment tax break update

The Investment tax break (or allowance) was introduced by the government to stimulate spending during what was predicted to be a period of lower investment. It was accompanied by a lot of advertising and encouragement for small business owners to take advantage of the investment.

However, there was a significant period between when the stimulus was announced by the government and when the rules were enacted by Parliament. This has resulted in very little guidance for those seeking to take advantage of the tax break.

Since the release of the legislation, the ATO have clarified many of the points of concern for business owners.

Does my asset qualify if I use it for personal as well as business use?
To qualify, the asset need to be for the "principal purpose of carrying on a business." This statement has led to a lot of debate and confusion regarding what that really means, particularly for assets such as cars, where personal use is difficult to avoid.

The tax commissioner has ruled that if the asset eligible, if it is used for carrying on a business for more than 50% of the time.

How do Hire Purchase agreements qualify?
To be eligible, the "investment commitment time" must occur after 12.01am on 13 December 2008 and before 1 January 2010. Also, for the asset to qualify for the 30% investment tax break, the investment commitment time must have occurred before 1 July 2009.

So what is the "investment commitment time"? The Tax Commissioner has stated that it is the time at which the hire purchase agreement was entered into. It is not the time the deposit was paid, or the order placed. You may need to check your dates if claiming the tax break.

Are demonstrator vehicles eligible?
Generally the tax break only applies if the vehicle is new. Demonstrator vehicles have been used for "testing and trialling". According to the ATO, a demonstrator vehicle will be considered new if it has been used for demonstration purposes for a period of up to three months. To qualify, you will need to prove that the car was only held for this period for testing and trialling. What the dealer calls a "demonstrator" vehicle does not automatically fit the ATO's definition.

For further clarifications or assistance on how to use the tax break in your business, contact us.

Quote of the month

"With audacity one can undertake anything, but not do everything"
Napoleon Bonaparte