Business Adviser How to exit your business well Summer

Business Adviser
Summer 2008
Issue 35
How to exit your business well
Is there ever a right time to prepare your
business for sale? Some might say the
right time is right from Day 1 of owning
it. But you are more likely to think about
exit strategies at a certain stage of life.
If sale is on your horizon, the current
market environment is as good a time as
any to act.
One positive of the current economy is
that if business growth has stalled, the
reasons can be fairly easily explained to
potential buyers. There are other aspects
of this market that can work to your
advantage too. This maybe the ideal time
to acquire market share, to provide a
stronger competitive position. You may
find the staff you need to take you to a
new level. You may be able to clear some
assets to provide greater focus on other
core parts of the business, or pursue a
new opportunity.
So the first consideration in planning for
sale is not to make assumptions about the
market conditions and when is the “best
time”. It is more important to consider
who will be the ideal purchaser and how
will you position your business to be as
attractive as possible to them.
Other considerations include:
What influences the value?
The normal basis for purchase is a
multiple of maintainable profits, so
ideally you want to groom your business
to show a solid, and preferably growing,
earnings stream. That might mean:
• Signing a long-term contract with a
key customer.
• Implementing a marketing strategy
that will drive the business forward.
• Getting some key staff in place.
• Making a strategic acquisition that
provides a point of difference in
product or service mix.
The better the business looks in terms of
growth and profitability, the higher the
multiples it will achieve for the industry
it is in.
The purchaser’s main considerations
will include:
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Cash generation.
Quality of financial data.
Certainty of future earnings.
Sector and market position.
Potential liabilities.
Synergies.
Different types of purchasers present
advantages and disadvantages. A
competitor has the advantage of
synergistic pricing, and speed, but
presents issues with confidentiality. A
purchaser involved in related activities
may be prepared to pay a premium,
but have limited understanding of your
industry. A private-equity buyer can
be considered ‘reliable’, but may be
slower to make a decision, and prefer an
exclusive position for a period of time.
An MBO may require fewer warranties,
but also may need finance.
Continued page 2
Who are the buyers?
Normally, there are key organisations
that have a special interest in buying
the business. For instance, a startup
biotech firm that has developed a new
technology will be of most interest to
a pharmaceutical company. A large
beverage manufacturer undoubtedly has
an interest in a successful “boutique”
drink. There are also the options of
corporate investment, and management
buyout (MBO).
Contents
01 How to exit your business well
02 A business-friendly government?
03 Avoiding family business disaster
Annual questionnaires go online
04 The bottom line of Christmas spirit
Office hours over Christmas
1
How to exit your business well
(continued from page 1)
The optimal purchaser is one who is
willing to pay a premium, who accepts
the business “as is”, and presents no
conflicts of interest or regulatory issues.
Financial aspects
Depending on the timeframe you have
for the sale, you should act to:
• Maximise maintainable profits.
• Reduce costs (but sometimes
you need to spend to create
options for purchasers).
• Manage working capital.
• Review and dispose of surplus
assets.
• Rationalise suppliers and
customers, to ensure there is no
over reliance.
• Ensure there is a strong
management team in place, that
is separated from the ownership
of the business.
Legal and operational aspects
Fundamentally, you are either selling
shares or assets. It is important to ensure
that legally, these can be handed over to
a new owner.
• How feasible is it to transfer
contracts?
• Are there any contingent
liabilities that will make it
difficult to sell the shares (or
lower the price)?
• Is there any pending litigation
that needs to be settled?
• Are all legal documents such
as leases and employment
contracts up to date?
Operationally, you need to make
sure that the business can function
under a new owner. This may require
consideration of the impacts on an
employee share scheme, or there may
be third-party assets that cannot be
transferred, but that would affect
the running of the business. It’s also
important to:
• Set out strategy.
• Resolve tax issues.
• Simplify and document
systems.
The sales process
Whether the sale is managed by auction,
general or targeted marketing, it’s
important that potential purchasers are
aware that a competitive process is in
place, including a timeline and that the
process is professionally run.
A rigorous process also creates
confidence and a more certain outcome
for both vendor and purchaser. This
process is built through:
• Initial proposals.
• Due diligence.
• The offer.
• The final documentation.
If a purchaser considers the process is
being poorly managed, they are unlikely
to invest time to assess the business.
For further advice, please contact your
Grant Thornton adviser.
A business-friendly government?
It is now time to see if National will
fulfill its promise to let small business
“get on with running their businesses”,
as its campaign slogan promised. It
has begun boldly, in quickly passing
legislation covering new tax rates and
a 90-day probationary period for new
employees in small businesses (fewer
than 20 employees).
Pam Newlove, director of Grant
Thornton’s Business Advisory Services,
says the drop in the company tax rate
from 33 to 30 percent in April this
year by the previous government will
have limited benefits for most business
owners. “This is because any profits
taken out of the company and given to
shareholders will ultimately be taxed at
the marginal tax rate of the shareholder.
For most businesses, trusts hold most of
the shares in the company, and the trust
tax rate is 33 percent.”
The personal tax cuts announced in mid
December should deliver a small boost
to the economy, she says. While most
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rates remain unchanged from 1 April
2009, the top rate for incomes of $70,000
or more has been reduced from 39
percent to 38 percent, and will reduce to
37 percent in April 2010. A cut from 21
percent to 20 percent for income earners
in the $14,001-$50,000 bracket takes
effect from 1 April 2011.
The Government has also announced
changes to Kiwisaver that will see
the minimum rate reduce from four
percent to two percent, and two percent
will be the default contribution rate
from 1 April 2009 for new employees.
Employer contributions will be capped
at two percent, but the employer tax
credit will be discontinued from 1 April
2009. The employer superannuation
contribution tax exemption will be
capped at two percent, which means that
any employer contributions over two
percent will be subject to ESCT at 33
percent.
As well as the above changes, an
‘Independent Earner Credit’ has
been introduced for people who earn
$24,000 a year or more and who are
not receiving a benefit, Working for
Families payments, or New Zealand
Superannuation. This amounts to a
rebate of $10 per week from 1 April
2009, and $15 per week from 1 April
2010. Obviously this will create some
extra compliance costs in that some new
PAYE codes will be required, though
this is not expected to be too onerous.
But Ms Newlove suggests the
government must concentrate on further
measures that don’t add to the very real
burden of compliance costs for small
businesses.
National’s plan to provide choice for
accident insurance in the workplace has
benefits to “pockets of business owners”,
she says. “But the changes must be done
properly.”
Avoiding family business disaster
reviews of family members who hold
senior executive positions.
The business as personal piggy bank
Family businesses make up more
than two out of three companies
worldwide, and employ more than half
the industrialised workforce. Equally
significant, less than a third of family
businesses survive to the next generation,
according to Grant Thornton research.
What are the peculiarities of family
businesses that create such a high level of
attrition? Here are some of the common
mistakes.
The ‘Royal Family’ Succession plan
Promotion of the eldest child, regardless
of skills, market appeal or interest in the
business is not recommended. Choose
your successor based on their ability and
skill in business.
The mortgage-based remuneration
policy
Paying family employees at levels
commensurate with their mortgage,
rather than their skills, is a waste of
money. It can also be de-motivating for
non-family employees in similar roles.
Take care also to avoid the ‘overpaid and
spoilt’ or ‘underpaid and resentful’ traps.
The ‘happy family’ performance
review
It can be hard to be objective about
family members. Too often your view of
their performance will be impaired due
to the family relationship. To get around
this, outsource the role of performance
Some family businesses are characterised
by a blurring of personal and business
money management – fuzzy approval of
personal expenses, ad hoc compensation
payments, and one-off personal cash
injections to ‘get by’. Ensure your family
member compensation is via payroll,
that independent approval is required
for personal expenses, and that loans are
properly documented.
The caged animal syndrome
It is quite common for adult children to
reluctantly continue their employment
in the family business, when they would
prefer to work elsewhere. Confirm,
annually, that family members are
enjoying the role and want to continue
their involvement. In addition, there is
merit in having them gain experience
working in other organisations.
Inter-generational misfortunes
Often business owners leave their
wealth tied up in their business. It makes
sense up to a point – the business needs
capital to grow, and with the input of a
committed business owner, the returns
are high. But even the most stable of
businesses can go through periods of
uncertainty, increased competition,
litigation or misadventure. Therefore it
pays to build an income stream away
from the family business over your
lifetime. In addition, succession to the
next generation is often more successful
when you are not reliant on the business
to provide an income for you in
retirement.
run, who should be employed and how
much they are paid. But running your
family business as a democracy is the
fast route to divorce and bankruptcy. All
family members should be considered
in relation to three roles: employee,
management and owner. They should
be paid for the work they do and behave
and be treated like other staff.
Keeping non-family members in the
doghouse
As the business grows, outside talent
is a must. Make sure that non-family
members are included, and have clarity
on their rights, career development and
rewards. Acknowledge the contribution
and effort from non-family employees,
especially at senior management level,
through participation in planning,
management, bonuses and incentives.
Governance group think
Dependent on the size of the family
business, involve non-family members
as independent directors to provide
objectivity on performance.
Soft financial structures and reporting
Managing a family business is not like
balancing your chequebook in front of
the TV. Systematic collation and sharing
of management information with the
right people is critical.
For further information, please contact
your Grant Thornton adviser.
Democracy - the fast route to disaster
Spouses, children, children’s spouses,
ex-spouses, grandparents – all can have
a view on how a business should be
Complete annual questionnaires online
We are pleased to advise that from March 2009, our annual client information questionnaires will be available for completion on
our website via secure access.
This will enable clients to enter annual information questionnaire responses electronically.
We will contact you closer to March advising of access passwords and other information required to complete this
process online. For those clients who wish to complete these questionnaires manually, that option will still be available.
3
The bottom line of Christmas spirit
‘Tis the season for Christmas parties,
gifts and entertainment, and while not
wishing to dampen the Christmas spirit,
the tax consequences of festive spending
should not be forgotten.
Christmas expenses fall into three
categories when it comes to tax.
Understanding the impositions at each
tier will help you avoid any unexpected
New Year surprises.
Fully deductible (and not subject to
FBT)
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Meals while travelling on
business.
Food/drink at a conference or
training course that runs for
longer than four hours.
Meal allowance for overtime.
Morning and afternoon tea.
Promotions open to the public.
If an employee’s salary package
includes a taxable allowance for
entertaining clients.
Entertainment overseas.
Some specific examples of fully
deductible (and not subject to FBT)
expenditure are:
• Staff morning teas/afternoon teas.
• Team building conference (not
including spouses).
• Sponsorship of external sports
team (classified as advertising
and requires some link to the
business).
Fully deductible (but subject to FBT)
Any type of entertainment -related
expense that is liable for FBT is fully
deductible (as is the FBT itself). Some
specific examples of fully deductible
expenditure subject to FBT are:
• Gifts other than food and
beverages to employees (most
things will fall into this category).
• Restaurant vouchers able to be
used at the employee’s discretion.
• Movie tickets able to be used at
the employee’s discretion.
If you require further information on any of these
topics or would like details on other accounting
matters, contact your local Grant Thornton office:
These fall into the “Other benefits“
category and will necessitate an FBT
return and payment.
Spending on “other benefits” otherwise
subject to FBT will be exempt from
FBT if it is under $200 per employee
per quarter or less than $15,000 for the
employer for the last four quarters,
including the current quarter.
50% deductible (and no FBT)
These expenses are only 50% deductible:
• Entertainment incurred in
relation to an existing or
prospective business contact or
client.
• Entertainment of staff to maintain
goodwill.
Some examples are:
• Staff Christmas party.
• Christmas lunch/dinner for
colleagues/referral sources.
• Food and wine provided to
colleagues and referral sources.
• Gifts of food or wine to staff (if
not subject to FBT).
• Food and drink provided for a
function on business premises.
Please contact your Grant Thornton
adviser if you have further questions.
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Office hours over Christmas
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Closes: 12.30pm, 24 December
Reopens: 8.30am-3.00pm, Monday 5 January
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Normal
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