Business

It’s the final quarter of the financial year, and now, the importance of integrating business valuations and appraisals with strategic tax planning becomes particularly significant. This is a crucial period for accountants who aim to leverage every available tool to ensure optimal financial health outcomes for their clients. Business valuations and tax planning are intrinsically linked. Understanding the value of your client’s business and its constituent parts provides a foundation for effective tax planning, particularly concerning Capital Gains Tax (CGT) concessions. This is particularly important when considering exit and succession planning for your clients as it can have a significant impact on CGT payable when it comes time for the business or entity to be sold or restructured. Understanding and applying the CGT concessions correctly hinges on not only understanding its value at the time of the transaction, but ought to be monitored to ensure compliance with specific CGT concession requirements, whilst also providing crucial information for the creation and safe-guarding of value over time. One of the primary tests in CGT concessions is the 80:20 rule, which requires careful consideration and documentation, as it stipulates that at least 80% of the assets held by an entity must be used in the active conduct of a business for it to qualify. This is not at a single point in time, but rather it must be satisfied for more the majority of the years it has been held in its current shareholding (up to 15 years). Misinterpretations or miscalculations in applying this rule can lead to substantial tax implications. As such, regular appraisals play a vital role in maintaining an up-to-date understanding of the value of the business and the value of any goodwill it might hold, which is often critical in determining the value of the underlying assets of the business and will affect the assessment of the proportion of active to inactive assets. Regular appraisals ensure that businesses are not undervalued or overvalued at critical junctures, such as a sale, acquisition, or annual tax assessment, and by their very nature create a permanent file note for future reference. Sometimes an appraisal is not going to be sufficient to meet the compliance requirements, and you will need to either perform or have a third party perform a valuation that meets APES225 – Valuation Services requirements. This is going to be wherever a transaction is taking place where shares change hands or where a business is bought or sold as a part of a restructuring transaction. Whereas an appraisal is perfectly suited to delivering advice for ‘internal purposes’, and for making file notes. Occasionally, you might seek to outsource an appraisal, or have a valuation performed in its stead so that you can have an independent third party provide advice around critical features of an appraisal or valuation, such as the quantum of working capital required by the business, or where rapid depreciation has distorted the balance sheet of the entity to such an extent that you need expert guidance. In these cases, the judicious use of independent valuers can be a useful derisking exercise, to ensure that you can demonstrate due diligence in your professional assessment of the business or entity in question. For accountants, deepening their understanding of these elements is not just about compliance—it’s about providing strategic advice that can significantly impact a client’s financial trajectory. Compelling business valuations empower accountants to offer more than just tax advice; they enable proactive business planning that aligns with long-term goals and market realities. Try BVOPro For Free

Most accountants and small business operators have a pretty well tuned bullshit detector. You can smell a snake oil peddler from 20 paces. We all receive 50 emails and 10 calls a day at a minimum trying to get us to buy the new great tool, the latest time-saving apparatus, or our very own bridge over Sydney harbour. Am I any different? I’d like to hope so. I became an accountant because numbers and patterns come easily to me, and accounting paid well. It wasn’t because I was motivated to revolutionise the tax system, nor to add to accounting theory in some imperceptible and esoteric way. No, I did it because when I was 18 it seemed like the easiest way to make good money as an adult. I was blessed as a kid with having an incredibly tight-knit family and a father who was, and continues to be, an early adopter of technology. When faced with the options of taking our family on a big holiday adventure (for my parents and all four of us kids), or the purchase of a home computer… My Dad opted for the Dick Smith System 80! This was a version of the Tandy Radio Shack TRS 80 available elsewhere in the world. I think I was about 6 when we got that computer, and it changed my life. I had to type out pages of programming in ‘BASIC’ computing language and then debug the code in order to play a game. It taught me many things… but chief among them was patience, recognising patterns, and applying them. It also taught me about delayed gratification. It would be hours of work to get that program working and when it finally did work, I had a game to play. These are themes I’ve seen repeated throughout my personal and business life. By the time computers started turning up in schools a few years later, I was the annoying kid in class who was showing the teachers how to use them and then sitting bored whilst they taught the other kids stuff that I already knew. I may or may not have been the annoying kid in class thereafter for different reasons. But I digress. Numbers have always come easily to me, and so mathematics has always been something I gravitated toward. By the time I was in senior school I was elected to the Student Representative Council (SRC) and given the role of Treasurer. When given this illustrious portfolio, I was handed the accoutrements of my station. A folder of bank statements and an exercise book with notes relating to prior income and expenditure. I would not have called myself a diligent student. Far from it really. But I did like a challenge. So, when my cursory review of the financial records of the SRC indicated that our measly prior year balance of around $4,000 was no longer in our account, I did a bit of digging. A few days later I had an appointment with our school principal, Mr. Bray, and presented my cross-referenced findings. I still remember Mr. Bray smiling a little before telling me that the school had indeed ‘absorbed the SRC balance into the school general fund’ and that he would ensure that the full amount was returned… that was my first taste of the power of being able to look a little deeper, see the patterns, and do something about it. So, when University admissions came around after I had finished high school, I elected commerce, and specifically accounting, because to me it was easy. I did the degree. I worked as an accountant. And I was bored. I became an auditor. And I was bored. I found a fraud whilst auditing. I wasn’t bored… for a while. I became a corrupt conduct investigator for the NSW Health Service, but after a few years of that I was again finding it boring. There was no longer enough numbers and patterns to keep me interested because I was looking at human behaviour and malfeasance rather than glorious numbers, my data of choice. So, I went back to university and got myself a master’s degree in forensic accounting. To me, it all makes sense. It was essentially a master’s degree in performing complex analysis and then explaining the analysis and the complex financial patterns in the simplest way possible so that people could make important decisions. My speciality in public practice as an accountant quickly became how businesses are valued, and why. I have given evidence in court throughout the country many, many times, valued thousands upon thousands of businesses, and assisted owners with understanding what their businesses are worth, why, and how they can change it. Over the last decade or so, I built software (with assistance obviously, as my programming skills never progressed from parroting BASIC I saw elsewhere), that allows me to value businesses very quickly, because it simply streamlined the system I have used for most of my career. I built it for me because it made my life easier – it let me do my job faster and more profitably. But what it also did, almost by accident, was it exposed me to the raw data of small business. It let me compare businesses of all types and it let me see the things that set them apart, but also the commonalities. But above all else, it laid bare the patterns. To me they make sense and I see the threads that connect them. So, I set about explaining them as simply as I could. What I ended up building (with my amazing team) was a piece of software that examines each business as a myriad of data points that you see every day without thinking of them as a ‘data point’. That is not to say that my software is infallible, and that the quintessence of a business can be reduced to a bunch of on/off buttons. Wait, can we pause just here to bask

As financial professionals, we understand the importance of risk management in ensuring the success and longevity of our clients’ businesses. One critical factor to consider when assessing risks is the security of a business’s location. For businesses where their location is critical to the ongoing success of the business, securing lease terms that extend as far into the future as possible is crucial. Negotiating favourable lease terms is a complex process that requires a deep understanding of the real estate market, as well as legal and financial considerations. As you work with your clients to negotiate lease agreements, it’s important to keep in mind the long-term implications of the terms being negotiated. Will the terms of the lease allow your client to stay in the location for as long as they need to? Are there any clauses in the lease that could put the business at risk if certain conditions are not met? Is the client able to effectively transfer the lease to a new business owner if necessary? etc. A recent client of ours had actually run out of their existing lease and was operating under a ‘month-to-month’ lease, where the landlord could ask them to vacate within 30 days, leaving them homeless. The business was otherwise quite low risk and profitable. We advised the client to consult a lawyer and negotiate a new lease before placing the business on the market, as the premium they could add to the business value was in the order of $230,000. Definitely worth the time and expense to engage a lawyer to help negotiate a lease! Don’t forget that lease agreements can be renegotiated. Building a good relationship with the landlord and negotiating favourable terms can make a significant difference in the future of the business. Securing long-term lease agreements can provide stability for a business, which is especially important during tough economic times, and given the current economic climate, that could only be a good thing! Diversifying your client’s locations is another important step in mitigating risks related to their location. Having multiple locations can provide a cushion against unforeseen events such as natural disasters, economic downturns, or changes in consumer behaviour. However, this strategy comes with its own set of challenges, so be sure to carefully assess the costs and benefits of each location before expanding. Conduct thorough market analysis and assess the potential risks and rewards of each location. Zoning and land use regulations are also factors to consider when assessing location-related risks. For example, a business I was valuing (a few years back now), was being valued for potential purchase by my client. The business was being sold with an extended lease on purpose-built premises owned by the current business owner, at great expense. What had not been disclosed was that the business was located in a ‘corridor’ designated as the path of a new motorway that had recently been approved for construction, leaving the prospective purchaser to deal with relocation of the business and dealing with the inevitable bureaucracy for compensation. Our valuation reflected the risks associated with this discovery… with a significant reduction in value when compared to the business listing price. Depending on the industry, there may be specific zoning requirements or regulations that affect the ability to operate in a specific location. Understanding these regulations and ensuring compliance can help avoid any legal or regulatory risks. Consult a (good) lawyer to ensure that your client’s business is in compliance with all relevant regulations. Ensure that the client business has adequate insurance coverage for the premises in place to protect the business in case of any unforeseen events. Depending on the nature of the business and location, there may be specific insurance requirements or considerations to keep in mind. Talk to your preferred insurance professional to ensure that the right coverage is in place, or at least learn what options are available. Securing the lease terms of a business addresses one of the major risks facing a business: ensuring a stable location going forward. Proactively helping your clients address their business premises risks is a good first step in protecting their assets… in short ‘Lock it in Eddie…’ Value My Business Now

Over the last few years, the Federal Government has introduced a suite of instant asset write-off and accelerated depreciation rules, whereby eligible businesses can either claim: an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use; Or, Accelerated depreciation, which applies to all newly acquired depreciating assets which are not eligible for the instant asset write-off (ceased in June 2021). The general effect of instant asset write-off incentive is to allow businesses to purchase assets up to the threshold of $150,000 (as at the date of this article) and claim the entire amount as a deduction against their taxable income. This also encouraged business owners to invest in plant and equipment and other work-related assets, supporting the economy during the COVID pandemic. The temporary accelerated depreciation allowances allowed businesses to rapidly write-down the value of assets that were valued at more than $150,000, allowing an initial year deduction of 50-57.5% (depending upon eligibility criteria), before it is added to the existing asset pool and depreciated normally. I’ve glossed over a lot of specifics on these provisions as this article is not about how to apply the write off provisions, but how they affect the valuation of a business or company. When assets are immediately written-off or depreciated in an accelerated manner, the market value of the asset will bear no resemblance to the value of the asset on the balance sheet of the entity (if it appears at all). The mechanism of writing-off or depreciating the asset allows you to offset the purchase price of the capital purchase against your income, which would not be allowable under ordinary circumstances, thereby reducing your tax payable. But at what cost? If the entity was not showing a profit anyway, the additional claimed deductions do little but assist in creating future tax losses. However, if the business is profitable and the deduction has the effect of reducing tax payable in that financial year, in real terms it has simply brought forward all or part of your future depreciation expenses forward. As such, the benefit to the entity is temporary. As a business valuer, it is a typical scenario to see a business borrowing to fund the purchase of a capital item and then availing itself of the immediate asset write-off provisions. The overall effect of the transaction is to see the Net Tangible Assets of the entity drop the value of the borrowed funds, and sometimes putting the entity into a negative equity position. Where a business and/or entity has been assessed as having no goodwill, the balance sheet must therefore be restated to show the current market value of all of the assets and liabilities held by the balance sheet… not just the ones that currently show up! For example, if a company bought a piece of equipment (financed by a bank), and elected to immediately write-off the value of the purchase, and that equipment is not reflected anywhere on the balance sheet or fixed asset register, the balance sheet is no longer reflecting what the company owns and owes. It would reflect only the loan. If that same company showed the equipment purchased on the balance sheet as wholly or partially depreciated, it does not reflect the market value of the company, but a version of the company viewed entirely through a prism of ATO compliance. A good business valuer will always consider the profitability of a company factoring in the replacement value of equipment as well as the current value of plant and equipment in order to reach an accurate assessment of the value of the business and/or the entity, including any goodwill. Where a valuer does not consider the current market value of depreciable assets, any prospective purchaser will find that the assets held cannot be depreciated, thereby reducing future taxable income, and they have an exaggerated goodwill line item that cannot be depreciated or amortised. It is therefore critical that current business owners and prospective business purchasers consider these issues before any transaction is entered into. Value My Business Now