Would you consider the following forms of sale consideration instead of cash (for a portion of the sale price) if you were able to achieve a higher overall price for the business on sale?
Whilst the immediate receipt of cash is the preferred form of consideration for a sizable minority of respondents(26.9%), a total of 73.1% of respondents would be willing to accept either shares in a public company (6.4%), the deferred payment of a fixed cash amount (19.9%), cash contingent of post-sale performance (5.8%) or a combination thereof (41.0%) if this achieved a higher overall price for their business on sale.
The willingness of an owner to consider various consideration payment options can greatly improve the chances for the completion of a sale transaction. It gives the parties the opportunity to remove the possible deal impasse that may arise over “price” by allowing the ultimate price paid to be determined by future results that fully reflect any improvements that the existing owners have implemented and which may not be reflected in past results.
It also gives the vendor the opportunity to continue to have an influence over the future performance of the business, or to share in a smaller part of a larger and more diversified public company.
If you sold the business to a family member, would you gift it to them or would you require payment?
Perhaps surprisingly, 55.2% of respondents indicated that they did not intend to pass on the business to a family member or, if they did, a further 22.4% of respondents would require payment for the business. Only 16% of respondents indicated that they would “gift” the business to a family member.
The foregoing responses may reflect a significant change that has taken place in social attitudes over the past four generations. Past generations have generally been characterised as builders of family businesses which they aspired to see handed down to their children and kept within the family for a number of generations. The survey responses indicate that this may no longer be the case.
The trend over the past four decades has been for Australian families to decrease in size. Australia’s total fertility rate (TFR) has declined from 3.5 children per mother at the height of the baby boom in 1961 to 1.89 in 2010 . The decline in TFR was most evident during the period from 1961 to 1980 and has tended to fluctuate in the range of 1.8 to 2.0 children per mother since the early 1980s. In the period from 1920 to 1961 rates were generally in the range of 2.5 to 3.5 children per mother (except for the post-depression / pre-war years of 1931 to 1940 when the rate was 2.1 to 2.5).
The increased rate of family breakdowns has compounded the issue of having a smaller number of potential successors within the family and the always present potential for conflict between family members.
In short, for family succession to be a viable option there must not only be family members who desire to continue the family business but they must also have the right combination of experience, education and general business acumen. Given the social and economic trends, all factors seem to be limiting, rather than increasing, the number of family members able to take over the business.
Do you know how much tax you would have to pay on the sale of your business if you sold it today at market value?
Approximately three-quarters of respondents are not aware of how much tax they would need to pay if they sold their business, or if they would be entitled to capital gains tax concessions on the sale.
Given that the after-tax consideration received on the sale of a business is generally more important to owners than the pre-tax price received, the responses represent a critical knowledge “hole” in an owners’ exit planning.
Taxation is a complex and ever-changing area where proper planning with the likely end-goal in mind can deliver significant benefit to the exiting business owner. It is important to appreciate that the appropriateness of any tax planning is dependent upon the objectives that it is designed to serve. As objectives change, so does the effectiveness of any existing tax planning. In short, what was appropriate when the business was expanding and growing, may not be as appropriate when an existing business owner is looking to sell the business.
Equally important is the fact that implementing the most tax effective structure takes time in order to avoid the possibility of negative tax consequences.