Considering Selling your Business

by Shawn O’Grady
3 Minute(s) to read

Considering Selling your Business

Small business owners are usually very good at what they do, often multitasking and juggling many tasks and working long hard hours. The way they feel about selling will most likely be tied to their motivation for doing so. Selling a Business will be an incredibly stressful, time-consuming process fraught with dozens of moving parts and truckloads of paperwork details, compliance issues and regulations that you can’t afford to overlook or get wrong!

Unfortunately, many business owners will often wait until the last minute to make hard decisions about selling.

In a perfect world, you’d have your exit strategy planned 5 years in advance. Unfortunately, most business owners don’t, and most don’t know when to start creating one!

Preparing to sell your business by maximising its efficiency, earning potential, 

structure and presentation pays off.

For example, minimising costs and increasing annual profit by as little as

$5,000 could add $20,000 to the sale price. We can help you recast your profit and loss (P&L) to determine your true discretionary earnings.

 

Pitfalls to Look out for:

  1. You may not take out, straight away, large amounts of your capital gain on sale of the business. If you do, you might find you get an unwanted tax bill.
  2. Generally, when a company makes a capital profit, the shareholders may only distribute this money to themselves if it is in the process of winding up the company. If they pay out before the company is officially in liquidation, they have to pay tax on the capital gain.
  3. If there’s no evidence to the contrary, the money taken out could be interpreted as a loan from the company to the shareholders, in which case Fringe Benefit Tax would apply, or you would have to pay interest to the company on the amount of its loan to you.
  4. If you are selling and winding up your business and you’re on a payment’s basis, save GST by paying as many bills as possible before you deregister at the end of the year.
  5. If you are an ordinary company and incur expenses in the year after selling your business, you’re not going to be able to claim them because there will be no income. You will have an unusable loss.
  6. Have as few bills as possible in the year after ceasing business.
  7. ACC and accounting costs come to mind. You might be able to adjust your provisional payment to ACC for the following year. To be a valid income tax claim, it would have to have been invoiced and be payable before balance date.
  8. For accounting costs, get your financial statements completed, invoiced and paid before balance date. Alternatively, ask your accountant for a price and make payment for the end of the financial year even if the accounts are not to be completed at that point.
  9. Remember to cease your GST if registered at the end of the financial year (giving you enough time to claim the accounting and ACC costs).
  10. If you’re selling about the time of balance date, you could save accounting fees by not continuing in business beyond the end of the financial year.
  11. On the other hand, if your income has been taxed at the top rate and your future income is going to be attracting a lower rate of tax, you could be better to sell (or cease business) partway through a year.
  12. The income for the part-year could be taxed at a much lower rate than would have been the case if it’d been part of a full year’s income.
  13. Remember to consider any Losses brought forward or imputation credits these can take some time to clear.

Consult your accountant – as soon as possible

Your solution is to wind the company up promptly. You should consult us to make sure this is done properly and enable us to check for tax pitfalls.

 

HAVE WE GOT YOU THINKING?

 

Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz

Keep an eye out for December’s article