Closing, selling or passing it on: Choosing the right exit for your business

17 Sep Closing, selling or passing it on: Choosing the right exit for your business

For many business owners, years — sometimes decades — of hard work go into building a business. Yet while considerable thought is often given to starting and growing a business, far less attention can be given to how that business will eventually end or change hands.

There are generally three broad pathways to consider: closing the business, selling it, or transferring it through succession planning. Each can achieve a very different financial and personal outcome, and each comes with legal, taxation and commercial considerations.

The important point is that exiting a business should ideally be planned well before the day you want to walk away.

Closing a business involves more than shutting the doors

Simply stopping trading does not necessarily end your legal responsibilities.

The process will depend heavily on your business structure. A sole trader, partnership, trust and company may each have different requirements.

For a business that is closing, consideration may need to be given to outstanding debts, contracts, leases, employees, customer obligations, insurance policies, licences, business registrations, intellectual property, stock and other assets.

Tax obligations also need to be finalised. Depending on the circumstances, this can include final Business Activity Statements, income tax returns, PAYG withholding obligations, superannuation and potentially GST or capital gains tax consequences arising from the disposal of business assets. The ATO requires businesses to finalise outstanding taxation and superannuation obligations and, where appropriate, cancel registrations such as GST and the ABN.

Employees require particular attention. Closing a business can result in genuine redundancies, potentially creating obligations relating to consultation, notice, accrued leave, redundancy payments and final wages under the Fair Work Act, applicable awards or enterprise agreements.

For companies, there is another layer of complexity.

A company doesn’t cease to exist simply because it stops trading. If it meets ASIC’s eligibility requirements — including having no outstanding liabilities and assets worth less than $1,000 — it may be voluntarily deregistered. Otherwise, a solvent company may require a formal members’ voluntary winding-up process.

Where a company cannot pay its debts as they fall due, insolvency laws become particularly important. Directors have obligations regarding insolvent trading, and options may include restructuring, voluntary administration or liquidation. Early professional advice in these circumstances can be critical.

Could selling produce a better outcome?

Closing isn’t necessarily the only option.

A business that has a loyal customer base, recurring revenue, valuable intellectual property, strong employees, established systems or a recognised brand may have value to another owner.

Rather than selling individual assets and shutting down, an owner may be able to realise some of the goodwill they have spent years developing.

Preparing for sale generally involves determining exactly what is being sold, obtaining an appropriate valuation, organising financial records, addressing legal or operational issues and negotiating a sale agreement.

A sale may also trigger taxation consequences and employee obligations, so the headline sale price should never be confused with the amount an owner may ultimately retain.

Employment arrangements can become particularly complicated when a business changes hands. Australia’s transfer-of-business rules can affect how employees’ service and entitlements are treated, making legal and workplace relations advice particularly valuable before agreements are finalised.

Succession planning: creating an exit rather than reacting to one

The third alternative is succession.

Succession planning involves preparing the business to continue after the current owner steps away. The successor might be a family member, employee, management team or eventual external purchaser.

A well-developed succession strategy can help prepare both the business and the incoming owner for the transition. The Australian Government recommends planning succession well before an intended departure rather than leaving the process until the last minute.

Succession planning may involve gradually transferring management responsibilities, documenting systems, reducing reliance on the owner, improving financial reporting, reviewing ownership structures and establishing how control and equity will eventually change hands.

It can also provide something that an abrupt closure cannot: continuity.

Customers may continue to be serviced, employees can retain their careers and the goodwill built over many years has the opportunity to continue generating value.

Start with the outcome you actually want

Perhaps the most important question isn’t simply, “How do I close my business?”

It is:

“What do I want my exit from the business to achieve?”

One owner may want the cleanest possible retirement. Another may want to maximise the value of a sale. Someone else may want the family business to continue for another generation.

Those objectives can require very different strategies.

An accountant can help model the financial and taxation implications. A solicitor can address ownership structures, contracts and legal obligations. A financial adviser can help consider how the proceeds or changing income position fit into your broader financial and retirement plans. Depending on the situation, business brokers, valuers and insolvency specialists may also have important roles.

The earlier these conversations begin, the more options you may have.

After years spent building a business, your exit deserves the same level of planning as your entry. Closing, selling and succession are not simply different processes — they can create very different outcomes. 

Professional advice can help ensure the path you choose is structured around the outcome you actually want.

If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.

This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.

(Feedsy Exclusive)