Preparing a business for sale: what to fix in the year before you list

Much of what decides how a sale goes is settled before you list: how clean the records are, how much the business relies on you, and whether the lease, contracts and assets can pass to a buyer. This guide covers what to work on in the year or two before you sell. For the sale itself, see how to sell a business.

Why preparation affects the price and the timing

A buyer pays for profit they believe will continue after you leave. Anything that makes it harder to check, or less likely to last, is a reason to offer less, add conditions or look elsewhere.

Preparation also affects timing. Problems found in due diligence cause delays, and some steps take time: business.gov.au notes that transfers of leases, permits and licences can take up to 12 months.

Get the financial records clean

Buyers and their accountants will check your records against each other.

• Statements. Have your accountant prepare profit and loss statements and balance sheets for recent years, and keep year-to-date figures current.
• Consistency. Turnover and profit should be consistent with your tax returns and Business Activity Statements. Explain any differences in writing now.
• Lodgments. Lodge any outstanding BAS and returns.
• Evidence. Keep sales reports and bank statements that show sales becoming deposits, and stock records that match a physical count.

Separate personal spending and document add-backs

Personal or discretionary costs run through the business lower the profit a buyer sees, and a buyer will only add them back if you can prove them.

• Separate what you can. Ask your accountant which costs belong in the business.
• Keep a schedule. For each add-back, record the amount, the year, the evidence and why a new owner would not have the cost.
• Be clear about your role. Note your hours and roles, and whether the profit allows for a wage for you.
• Do not stretch it. One unsupported add-back can make a buyer doubt the rest.

See add-backs and normalised profit.

Make the business less dependent on you

A business that only runs well with you in it is harder to sell.

• Write it down. Document ordering, pricing, payroll, maintenance and who to call when something breaks.
• Delegate. Let staff make routine decisions, and train a second person in anything only one person can do.
• Introduce your people. Bring staff into your relationships with key customers and suppliers.
• Test it. Take time away and see what goes wrong.

The lease

For many businesses the lease is part of what a buyer is paying for.

• Term and options. Check how long is left, your options to renew and the dates for exercising them.
• Transfer conditions. business.gov.au notes that leases have different conditions on transfer, and that you remain responsible until the transfer is complete. Read yours with your solicitor, including any personal guarantee.
• The landlord. Clear any arrears or disputes, then raise a future assignment early, so there is time to deal with objections or negotiate a new lease.

See assigning a commercial lease.

Customer and supplier contracts

List the contracts the business relies on: key customers, main suppliers, franchise or distribution agreements and equipment rental. For each, check when it ends, whether it can be assigned or needs the other party's consent, whether it ends on a change of ownership, and what it costs to end early. If a few customers make up a large share of sales, expect a buyer to ask how secure they are.

Licences, permits and staff pay

List every licence, permit and registration, whose name it is in and when it expires, and ask each issuing body how it would pass to a new owner. Close out outstanding notices, overdue inspections and anything a regulator has raised.

Staff pay. A buyer will usually review payroll, so check that every employee is paid correctly. The Fair Work Ombudsman suggests confirming which award or agreement applies and the employee's classification and pay rate, checking for penalty rates, overtime, allowances, leave payments and leave loading, then comparing that with pay slips and payroll records. If you find an underpayment, it says to fix it quickly, back pay the employee and fix the cause, and that it is best to report it promptly, especially if it is large or long-running.

Equipment: what you own and what you owe

Make an asset register: each significant item, its age, condition and service history, and whether it is owned, leased, rented or financed. Leased and rented items are not yours to sell. Catch up on repairs and servicing, because a buyer will inspect.

Check the PPSR. The Personal Property Securities Register records security interests, such as a lender's right to take and sell equipment if a loan is not repaid. It is not a register of ownership. A buyer can search it against your details (usually your ACN, or your name and date of birth as a sole trader), so search it yourself first. The PPSR says a registration should be ended (discharged) when the secured party no longer has an interest, for example after a final loan repayment, so ask for any that remain to be discharged.

Intellectual property and online assets

business.gov.au lists domain names and web registrations, intellectual property and business records among the key things to transfer to a new owner. Check that each is yours to hand over.

• Domains and website. Whose name is each domain in, and who controls the hosting and admin logins?
• Social accounts, phone numbers and email. Move anything on a staff member's personal login, and confirm numbers can transfer.
• Customer lists. Keep them current. business.gov.au reminds sellers to comply with the Australian Privacy Principles when disclosing personal information to buyers.
• Business name. Check the registration is current and held by the selling entity, and decide whether it is included. List any registered trade marks.

Plan the tax early

Selling can trigger capital gains tax, and GST may apply. business.gov.au suggests working out early what tax you will owe.

The ATO's four small business CGT concessions (the 15-year exemption, 50% active asset reduction, retirement exemption and roll-over) can reduce, disregard or defer a capital gain. Each has conditions, and some depend on how and when you sell.

• Basic conditions include aggregated turnover under $2 million or meeting the maximum net asset value test, and the asset passing the active asset test.
• How you sell. Selling shares in a company or an interest in a trust, rather than the business assets, brings extra conditions.
• When you sell. The 15-year exemption, for example, needs 15 years of continuous ownership before the sale, and the owner (or a significant individual of a company or trust) to be 55 or older and selling in connection with retirement, or permanently incapacitated.
• Choices. Apart from the 50% reduction, which applies automatically if you qualify, you must choose the concessions before lodging your tax return for the year of the sale.

See your accountant at the start, not once you have a buyer.

Decide how to sell and set a realistic price

How to sell a business compares brokers and private sales. If you use a broker, business.gov.au suggests checking their professional credentials. Owners and brokers can both list on BizExchange.

business.gov.au describes three common valuation methods: comparing similar businesses, net worth (assets less liabilities) and return on investment. See how small businesses are valued and try What's my business worth?. BizExchange listings label the profit basis and show a Multiple (asking price divided by published profit), so buyers can compare like with like.

A preparation checklist

• Financials consistent with your tax returns and BAS
• An add-back schedule with evidence
• Written procedures, and staff who can cover your tasks
• Lease term and options checked, and the landlord approached
• Key contracts checked for assignment terms
• Licences and permits listed with transfer steps
• Every employee's pay checked against the right award
• An asset register and a PPSR search
• Online assets and business name confirmed as transferable
• Accountant's advice on CGT and structure
• Broker or private sale decided, and a price you can explain