Uncategorized

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

Business valuations can be complex, and the rules can be hard to pin down sometimes. There are many business valuation methodologies that can be employed, aimed at determining the value of the enterprise. They are usually prepared on the basis of a hypothetical arm’s-length sale to a ‘willing but not anxious buyer’ purchasing from a ‘willing but not anxious seller’, where the parties are acting in good faith, with good information at hand. This is known as a fair market business valuation. However, what is not immediately evident from this description is that the business (or enterprise) being valued only the assets required to operate the business going forward, not everything that’s on the balance sheet! These assets are often known as the operating assets or business assets. The only liability that would ordinarily be included in the valuation is trade creditors, and even then it is only included if it is lower than the trade debtors, so that the surplus of debtors over creditors provides the new owner access to working capital. However, most business sales (as distinct from share sales) are transacted on a basis of ‘no cash, no debt’, meaning that the assets included in the sale would be limited to items such as plant and equipment, inventory, motor vehicles (that are used in the earning of income), furniture, fixtures, and fittings. All other assets and liabilities would ‘stay behind’ in the hypothetical sale, and the seller would be responsible for extinguishing any debts and realising any assets themselves. This can add some complexity at the time of sale if any of the assets that form part of the sale are financed and are used as security for that finance. It is therefore critical that discussions are held with your accountant, solicitor, business broker, and your lender prior to the transaction to ensure that you are able to simultaneously settle any secured debts on the sale of the business. When determining the value of shares in an entity, the steps are slightly different, but start from the same point. Firstly, a business valuation is performed exactly as it is above, and then we work out how much goodwill (if any) that the business possesses, and then that gets added back to the balance sheet exactly as it is, including all of those surplus assets and liabilities that would not be sold with the business if it was sold separately. However, SMEs will often possess a bunch of related party debt or assets that need to be removed from the company before the shares are transferred to its new owner. In this case, those surplus assets and debts don’t just ‘get left behind’, they have to be extinguished or transferred out of the entity, before the shares are sold. It is this rationalised (or adjusted) balance sheet that sets the price of the shares. Again, this is where you need to talk to your accountant, solicitor, business broker, and lender(s). Debt is a complicating factor in business valuations and entity/share valuations but getting the right advice from skilled professionals can mean the difference between a smooth, profitable, easy transaction, and well… the opposite! Value My Business Now

Small to Medium Enterprises (SMEs) can take many forms; some are better suited to your needs than others. In an ideal world, the best operating entity structure for your business will be put in place before you’ve made your first dollar, but I think we can all agree that such an outcome is highly improbable.. The best thing a new business owner (or prospective business owner) can do, is to seek the advice of a skilful accountant to attain tailored advice on the entity structure that best suits their needs at the time, given their particular set of circumstances. Bearing in mind, of course, that the structure that suits you best today may not be the best structure in 5 or 10 years’ time. Restructuring is a thing for good reason! In some circumstances, a simple sole proprietorship may be sufficient (where you operate under your personal name), whilst others may call for a company. Still, others may require the shares in your company to be held by a trust for ease of distributing the proceeds of your business in the most tax-effective manner… perhaps you’d have a corporate trustee for that trust. Maybe you’d have multiple companies, with one owning the operating assets, one trading the operating business, and one employing your staff… You could have another entity owning the goodwill or any trademarks you’ve developed… and all of those can be held by multiple entities and trusts. You can add to this the potential of partnerships of individuals, partnerships of trusts, partnerships of companies, and we haven’t even talked about unit trusts yet… it gets complicated pretty quickly. And each layer adds complexity and compliance costs. Quite simply, the structure that is suitable for you is not necessarily suitable for someone else or for another business, and often structures evolve, and not necessarily in an orderly or even appropriate manner. So, restructuring your business, whilst sometimes an expensive exercise (when you factor in potential capital gains tax issues, advice, and compliance costs), it can be much more costly to do nothing. For example, suppose your business has been happily trading in a trust or company for some time, and you are looking to sell in a little over three years. In that case, it is probably a good idea to talk to your accountant to see whether you need to restructure your business now to avail yourself of potential capital gains tax concessions, that could save you anywhere up to $1 million in tax on the sale of the business. It really is worth a discussion with your accountant… Accountants are often under-utilised, with their services limited to helping businesses stay compliant and deal with emergencies. But they are capable of so much more if you simply avail yourself of their strategic and tax planning skill set. And when it comes time to value those businesses, entities, or shares so that the restructures are tax compliant, we will be there to help you and your accountant. We can help make the complex as simple as possible and arm you with the best information to make the best decision that suits you and your business. Value My Business Now

When it comes to assessing the value of accounting practices, the valuation process can often become a labyrinth of confusion, particularly when distinguishing between valuations of a business, an entity, and a book of clients. Ironically, accounting practices, which serve as trusted advisors in their field, are frequently valued using a shortcut methodology known as the Industry Rule of Thumb (IRT). The IRT methodologies are a common practice for valuing businesses or entities within a specific industry. Instead of relying on precise calculations, this approach draws upon past valuation experiences and estimations within the industry that have generally come about over many years. IRT valuations typically involve using relevant multiples tailored to the specific industry in which the firm operates. For instance, small to mid-sized accounting firms are often valued based on a multiple of their revenue (typically ranging from 0.7 to 1.2 times the revenue). In the case of accounting practices, the IRT valuation method is not really valuing the enterprise of the accounting firm but assessing the value of a bundle of fees generated by a group of clients, reflecting their annual revenue contribution. It is important to note that the valuation focuses on recurring revenue, considering it as an asset of the business or entity. Thus, the valuation process does not encompass the entire business itself. Different practices possess distinct costs and risk profiles and operate in various geographical locations, each with its unique economic influences, and by applying an IRT revenue multiple, the specific risks of the enterprise of operating that accounting practice are entirely ignored. The most appropriate approach to valuing an accounting practice should involve a methodology that captures future earnings after paying the operating expenses that it must incur to attain those earnings as well as factoring in the particular set of risks that the business faces. This can be achieved through the capitalisation of future maintainable earnings method, which incorporates a capitalisation rate tailored to address the specific risks associated with the individual practice. Navigating the intricate landscape of accounting practice valuation demands a delicate balance of expertise, insight, and a deep understanding of the industry. By harnessing the power of accurate valuation methods, businesses can comprehensively understand their value and make informed decisions for long-term success. So, whether you seek to value your accounting practice, navigate industry norms, or comprehend the true value of your client base, embracing effective valuation techniques will empower you to unlock the true potential of your accounting practice. Value My Business Now

A commonly employed approach to business valuations is the Capitalisation of Future Maintainable Earnings (CFME), which establishes the business’s value based on a multiple of its earnings. So, lets delve into the intricacies of earnings multiples and their significance in business valuations. The CFME methodology hinges upon estimating the business’s Future Maintainable Earnings (FME) and capitalising them at a suitable rate. This rate considers various factors, including the business’s outlook, risk profile, investor expectations, growth prospects, and specific (and often unique) attributes. Analysing comparable market data is crucial for effectively implementing this approach. Business valuations can therefore be heavily reliant on FME, which can be derived from measures of earnings such as Net Profit After Tax (NPAT), Earnings Before Interest and Tax (EBIT), or Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). EBIT multiples can vary significantly based on industry, performance, and the relative risk associated with the subject business. Typically ranging from 0.8 times FME to well north of 5 times FME, EBIT multiples provide insights into the value of a business. In general terms, businesses with an annual turnover of less than $5 million often sell for less than 3 times EBIT, and those with a turnover below $1 million may struggle to achieve a 2 times EBIT multiple. As the turnover surpasses $5 million, businesses become more likely to attain multiples exceeding 3 times. Exceptional qualities that distinguish a business from its competitors are necessary to command a higher multiple. Of course, different industries exhibit varying earnings multiples, thus it is often difficult to compare businesses across differing industries. Some sectors witness higher multiples, indicating lower perceived risk, while others experience lower multiples, suggesting a higher degree of risk. Additionally, market dynamics and unique circumstances can lead to businesses being sold at bargain prices or premium valuations. Consequently, considering these factors is vital when determining an appropriate earnings multiple and conducting accurate business valuations. At its core, the earnings multiple reflects the inherent risk associated with a business’s ability to maintain its current profit levels. A higher multiple implies lower risk, indicating a greater likelihood of the business sustaining its projected earnings. Conversely, a lower multiple suggests higher risk and uncertainty regarding the business’s ability to maintain its profit level. Wrapping your head around earnings multiples and what they really mean is essential for understanding the intricacies of business valuation. The CFME methodology provides a robust framework for estimating a business’ value based on its earnings multiple. By considering factors such as business outlook, risk profile, growth potential, and industry-specific dynamics, analysts can accurately estimate FME and determine an appropriate capitalisation rate for the business in question. The take-away is this: the earnings multiple is an estimate of the level of risk exhibited by a particular business sustaining a particular level of profitability. Armed with a thorough understanding of earnings multiples, business owners and investors can make well-informed decisions regarding buying or selling a business. Value My Business Now

The term goodwill gets bandied about a lot in the business world, but I find it is often misunderstood. There are a few definitions, but generally only two of them apply in a business sense: the favour or advantage that a business has acquired especially through its brands and its good reputation the excess of the purchase price of a company over its book value which represents the value of goodwill as an intangible asset for accounting purposesSource: https://www.merriam-webster.com/dictionary/goodwill accessed 24 November 2022 Strangely enough, they are both correct… However, whilst goodwill does relate to the advantage enjoyed by a business due to its good reputation and brands (amongst other things), it does not have any value unless it satisfies the test set out in the second definition! If there is no excess in price (or valuation) over book value, there is no goodwill detected. So, one definition describes the nature of the beast and the other provides the accounting-based determination of how to recognise its presence. There seems to be a school of thought that a business must possess goodwill simply because it might own a pretty website, or maybe an Instagram following of 1000 people, has 5-star Google Reviews, owns a patent, or that its people possess some specialist knowledge or edgy haircuts. However, a business does not possess goodwill just because one or more of those (and many other) things are present. It doesn’t exist just because you think it ought to! Simply put, goodwill is the difference between the sales price of the business and the fair market value of its assets used in earning business income. Goodwill is a mathematical formula. The formula is simply telling you what a prospective purchaser would pay over and above the value of your assets to own the business… the difference is a measure of just how badly they want it! Unfortunately, many business owners get the wrong end of the stick when they try to work out what their business might be worth. For instance, I have seen many valuations where businesses are being valued by attempting to determine the value of goodwill and then adding that amount to the value of the assets of the business. This is in fact the direct opposite of how goodwill is calculated. Goodwill is intangible. You can’t touch it, see it, smell it… so how can you work out what it’s worth? The answer is surprisingly easy: you work out what someone would pay for the business, you work out what the value of all of the tangible assets are, and you take them away from that purchase price. What’s left is that murky, intangible thing that we call goodwill. You can’t even look at it for fear it will slink away… it is simply that mysterious. If the purchase price changes by even one dollar, so does the goodwill. If the value of the other assets forming a part of the sale changes, so does the goodwill… They are each intrinsically linked, and goodwill cannot exist independently of the other two. OK, so I have probably got a little too passionate about the definition of goodwill there. Anyway, moving on… I’ve lost count of the number of small business owners who have come to me asking to have their business valued and are surprised when I tell them that their business either does not possess any goodwill or that it is minimal. I’m not going to get into the nitty-gritty of how a business is valued or the various methodologies that can be adopted in valuing different businesses. This is neither the time nor the place. Instead, here are a few (general) home truths for why your business might not have any goodwill: If the business is mature and has a history of being unprofitable or highly volatile, it likely does not possess goodwill. Nobody wants to buy a business that they then have to put extra money into each year. If you are the business owner and do not draw a commercial salary for the work you do in the business, I will remove a commercial salary from the profit of the business. If there is now no profit, refer to Tip 1. No one should have to pay a multiple of their own salary to purchase a job. And no one wants to buy a business that does not make a profit. Telling me that the business could be profitable if the purchaser was to invest in marketing, change the business, or some other way of creating profit, you are likely telling me this because the business doesn’t make a profit. Refer to Tip 1. You are selling your business as it is right now, not some fantasy version of what the business could be under certain circumstances. If your business owns a patent, trademark, or other intellectual property but does not make a profit, refer to Tip 1. Sure, you might be able to sell the patent or trademark if it has some value to a third party, but the business doesn’t seem to be benefiting from it, and thus it does not possess goodwill. Just because there is a line item called goodwill on your balance sheet, does not necessarily mean that your business still possesses goodwill. The real question is does the business make a profit? If no, refer to Tip 1. Just because your business has allowed you to live a comfortable lifestyle does not mean that the business possesses goodwill. Often business owners have been pulling out way more from their businesses than they ought to, creating large shareholder loan accounts. Once again, does the business make a profit? If no, refer to Tip 1 You can’t expect to use your business as a vehicle for personal expenditure and tax minimisation and expect a valuer or prospective purchaser to ignore the financial results you have communicated to the tax office. Refer to tip 1. Obviously, there are exceptions to these ‘Tips’. For

As a business owner, sometimes there can be a bit of ego involved. The business is your baby, you built it, you’ve worked hard, and you are the backbone of that business. And there really is nothing wrong with that… except when it comes time to sell it. To understand how the value of the business can be affected by its reliance on the current owner you need only consider the proposition from the viewpoint of the potential purchaser. It’s basically like saying to them “I want you to buy this business at a premium price, but first I am going to fire the key employee before the sale’. Would you buy that business? I know I wouldn’t. Some businesses are completely unsellable because the business is entirely reliant upon the owner’s skill set, relationships with customers, knowledge of a particular product or service, or any other number of things that only the owner possesses. If it isn’t going to be left behind in the business once it is transferred to a new owner, why would they pay for it? Well, in short… they won’t. But the real kicker here is that reliance upon the owner does not just affect the value of the business in the open market, it also affects the business every day. The reliance upon one person in a business can impact the viability of the business itself. In some cases, an owner is the only person capable of signing cheques and processing payments, there is little if any delegation of key tasks, and as a result the growth of the business is hampered due to every complex decision needing to be reviewed and approved by the owner. This creates a bottleneck and means that the owner has to be involved at every step… and there is always a point at which that starts holding back the business. Having a strong, competent, empowered management team in place in a business means that any owner or prospective owner can confidently leave the day-to-day management of the business to the team. Its effect is twofold: It releases the owner from the day-to-day work whilst it also frees them up to start to work on business strategy to grow the business, and it significantly increases the value of the business due to the reduced risk caused by non-transferable owner expertise. So how do you grow that strong, competent, empowered management team that is going to make such a difference? Well, the owner first needs to determine what it is that they do every day. Once they work that out, the tasks that can be easily delegated to existing staff should be delegated! For more complex tasks they need to work out what their core competencies are so that they can find and hire new staff who possess those skills. For instance, they could include marketing, finance, sales, or technical staff. Finding the right staff can be tricky and time consuming. Sometimes it feels like you are paying someone else to do a job you could do faster and more efficiently and cheaper yourself. But stick with me… it is totally worth it! Once you have the staff, you need to mentor and train them so that they’re doing the job that you want them to do, and then actually delegate to them (and stop doing it yourself). The owner should then be a resource that the senior management team can turn to when they need guidance, rather than being the engine room of the business. When the time comes to sell the business, any prospective purchaser will see that the business can be operated without any owner involvement, and as such can be purchased as an investment at an arm’s length rather than as a prospective full-time vocation. When assessed by business valuer, the presence of a good management team is indicative of a lower transfer risk to a purchaser. Many business owners will read this article and think to themselves ‘that is all quite obvious’. But in the last 1,000 odd business valuations I have performed, I could count the number of businesses that operated without the owner working in the business on my fingers and toes. Value My Business Now