Questions to answer in leaving a business.
Table 1 shows the main ways for a business to grow or end. Unlike people who are born, mature and die, a business, although owned by people, need not have the same fate. Businesses can continue long after their founders have died. So when you have a business, and it is time for you to retire, what questions do you need answers for!
Regardless of the legal structure of your business, the questions you need an answer to are:
- Do you sell?
- Is the business bankruptcy or Insolvent?
- Is the business large enough to sell to the public (Initial Public Offering); or
- Do I stop trading?
- Do I sell? – Voluntary Retirement
A Sale Of Your Business As A:
- Sole trader
- Through shares in a company
- Staff (through a management buy-out)
- Unrelated third parties
Irrespective To Whom You Sell Your Business You Should Consider:
- What is more important: The sale price or the continuation of the business?
- Do you want the ownership retained by a family member, or do you want the business to be in the hands of the best person (you can find) to grow or continue the business?
- If the sale is to be to a family member, who in the family is to buy the business and how will the takeover occur?
- If the sale is to be to existing staff, who? All staff or just a few of the key employees and how will the takeover occur?
- Do you need expert help in succession planning?
If You Are Only Concerned With Maximising The Sale Price:
- What tax breaks will you receive if you sell the business and retire?
- What tax breaks will you receive if you sell the business and invest in another business?
- Are you prepared to remain in the business after it is sold? If so, for how long, and on what basis: as an employee, paid or unpaid consultant, or a director of the board?
- Are you prepared to provide a restraint of trade provision in the sale? If so, for how long and for what geographical area?
- Are you prepared to leave your name associated with the business after it is sold?
- Will the existing employees have to be dismissed, or will the new owner want to employ them?
If You Own The Premises From Which The Business Operates, Are The Premises To Be Sold:
- With the business
- Separately to the business
- Leased to the new owner
The issue of the value of the purchase price of the premises has to be addressed, or the rent to be paid must be negotiated.
If the business owns intellectual property that is yours, will the intellectual property be sold with the business, or will you retain ownership of it and license its use to the purchaser?
If you are going to license intellectual property thought must be given about how you are to assess and/or verify the accuracy of the license fees paid to you by the purchaser.
Bankruptcy or Insolvency
Bankruptcy occurs to individuals while insolvency happens to corporations.
Bankruptcy or insolvency is where the owners of the business cannot pay the debts of the business as and when they fall due.
Bankruptcy and insolvency occur not by choice but despite the best efforts of an owner. When a business ends from bankruptcy of its owner(s) or the failure of a corporation due to insolvency, the decision on whether the business is sold or closed is that of the insolvency practitioner that has control of the business. The owner’s concerns in these circumstances are:
- Can you prevent yourself from being declared bankrupt?
- If you are declared bankrupt, what are the consequences to you continuing in a profession or trade? For instance, a landscaper who is bankrupt can (if they have the funds commence) trade on their own account
- Will you have enough income to maintain your family life as you have done in the past?
- What effect will bankruptcy have upon you and for how long?
- In the case of insolvency, whether you will have enough assets to meet personal debts, and whether you have given guarantees in support of the business which you must pay
- If a director of a company that has been liquidated, were you a director at a time when the company was trading insolvently? If so, you may have personal liability for the debts incurred by the company during this time.
Initial Public Offerings –Voluntary
An initial public offering or IPO is what is also known as a public float. When a business is of a size that requires that it needs further capital to grow, and the capital cannot be obtained by way of debt, or when you have reached a point when you are prepared to trade off a large sum of money in return for losing absolute control of the way you run the business, an IPO should be considered.
In a technical sense, an IPO is a sale by you of your business for cash and or shares to a public company. In the sense that an IPO is a sale the considerations of selling (above) are relevant. When considering an IPO, you should consider:
- Whether you are retiring from the business or relinquishing some control?
- If you are remaining in the business but with lesser control, how much control will lose?
With an IPO, you must accept that your business is no longer yours. It will be owned and controlled by a public company – the public company in turn being controlled by directors and senior management. Is what you are to receive from the IPO enough consideration for you to take this risk?
Can the business afford the extra costs of operating as a listed company? Will the revenue of the business be enough to pay:
- Independent directors
- Listing fees
- To manage compliance policies and procedures for such things as: ASX listing rules, competition and consumer practices, work, health and safety, employment, recruitment and dismissal, intellectual property, contracts, and any specific issues that are pertinent to the operations of the business
In leaving a business you may decide to stop trading. Your decision may be based upon you not being able or willing to sell something that has become part of your alter ego. It may be because there is no buyer. Whatever the reasons for closing down, the considerations you need to take account of are:
- Do you have enough money on hand or from the sale of assets to pay all the debts of the business?
- How much money will you have to pay the employees on them being made redundant?
- What expenses will you incur in ceasing to use a business name or trade mark?
- You must ensure that you have enough money to pay all creditors otherwise you must stop trading through bankruptcy or insolvency?
- What expenses are there in deregistering a company if you operated your business through a corporation?
- Is it the most appropriate course of action to stop trading and if so at what time? Should it be during a financial year or will there be tax benefits if it is just after the commencement of a new financial year?
- Will you receive a capital loss by ceasing to operate the business?
- By ceasing to trade, will you have the cash to be able to pay all the costs associated with the cessation of the business or will you need to find out the costs of ceasing to trade and then after saving the money required, close the doors? If you will need cash when will you be in a position to have the money to close the doors?
Retiring – Next Steps…
Having regard to the many considerations in leaving a business you must take the time to answer these questions. If in doubt seek expert advice on the various issues that need to be taken into consideration. You can contact us at etiennelawyers.com.au