The pros and cons of selling a business

Clients seeking advice on selling their business is not uncommon. For the majority, it comes when a competitor or another interested party approaches them, rather than them saying it is time to hang out a ‘for-sale’ sign. When a proposal comes your way, it can be confronting. The thought may have been lingering in the back of your mind, or you may not have entertained the idea at all. Whatever the case is, when there is interest, you do need to get advice, clear the emotion, and look at the facts and figures.

When a client comes to me regarding the sale of their business, they are generally excited, and fair enough; it is also a flattering experience to think that all your sweat and tears have potential sale value.

Without wanting to dampen the vibe, the first thing I remind clients is that a business’s market valuation isn’t the whole story. In the SME market, businesses are often valued using a multiple of earnings; for example, a buyer might offer 3 times your annual profit based on industry norms. That gives a quick estimate of what someone is willing to pay.

But as the owner, you should ask: What is my business worth to me if I continue to run it?

Consider a simple example. Let’s say your company’s profit, after paying yourself a reasonable salary, is around $300,000 a year. You also draw a salary of $200,000 for your role, meaning the business provides you with $500,000 in annual income, which includes your salary and profit. Now, suppose a buyer offers $900,000 for the business, roughly a 3× multiple of the $300k profit. On paper, that aligns with typical market valuations for small businesses.

But consider this: by continuing to operate the business, you would earn $500,000 per year. In just two years, you’d make the $1 million mark in income, more than the sale offer, and you’d still own the business. Over five years, that’s about $2.5 million in earnings, all while retaining the company, which you could potentially sell later anyway.

This is the “true value” conversation I have with clients. If the lump sum offer is lower than what you’d reasonably earn by keeping the business for a few more years, selling might not make financial sense. The external valuation might satisfy an investor’s formula, but it might undervalue the real-world benefit you get from owning and operating your business.

Your hard work, customer relationships, and “sweat equity” don’t always reflect neatly in an EBITDA multiple.

In short, don’t sell yourself short! Unless there’s a strategic reason or an exceptionally high offer, say, a much higher multiple that covers many years of future profits, the business could be worth more to you than the bird in the hand.

That being said, there are numerous valid reasons to sell a business. Every owner’s situation is unique. Here are some of the potential advantages I discuss with clients when weighing a sale:

• Immediate financial reward: A successful sale can provide a large lump sum payout. This windfall could allow you to pay off personal debts, invest in new ventures, boost your retirement fund, or simply enjoy a lifestyle upgrade. Diversifying your wealth out of the business can also reduce your financial risk.
• Reduced stress and responsibility: Running a business can be all-consuming. Selling can offer relief from the day-to-day operational stress and responsibility of being an owner. No more worrying about next month’s payroll, managing staff, or putting out fires 24/7.
• Opportunities and retirement: Maybe you’re ready to retire and want to enjoy the fruits of your labour. Or you have other projects you want to pursue without the tether of your current business. A sale can free up time and capital to make that possible.
• Market timing and risk: Sometimes owners see storms on the horizon. The industry is changing, and upcoming competition/technology could hurt the business in the future. Selling while your business is performing well can lock in value before any downturn. In a booming market, an established business can fetch a premium, so timing can be everything. If selling now secures a great price that might not be available in a few years, that’s a strong reason to sell now.

Naturally, selling your business also comes with trade-offs. I often play devil’s advocate with my clients, ensuring they consider what they’ll be giving up. Some key cons of selling include:

• Loss of future income: As highlighted earlier, once you sell, you forgo the future profits and salary the business would have generated. If your business is consistently profitable, walking away means losing a reliable source of income.
• Letting go of “Your Baby”: There’s often a deep emotional attachment involved. Many owners feel a sense of loss after handing over the keys. It’s not just a business, it’s part of your identity. That emotional value doesn’t show up on a balance sheet or in a buyer’s offer. Be prepared for the psychological impact of letting go.
• “What’s next?” and loss of control: After a sale, you might find yourself wondering what to do next, especially if you’re not ready to retire. Some former owners miss the purpose and challenge of running a business. Additionally, selling means losing control over how the business is run in the future. The new owner might change the business in ways you wouldn’t, which can be hard to watch from the sidelines. If you care deeply about your company’s legacy, this loss of control is an important consideration.
• Potentially undervaluing your business: In the small business market, buyers often seek a bargain relative to larger corporations. As the seller, you might feel the offers don’t recognise all the intangible value of your enterprise, such as brand reputation, loyal customers, etc. Many owners are disappointed with external valuations, as they rarely account for the blood, sweat, and tears that go into the business behind the scenes. Unless a buyer is offering a very generous multiple, selling can sometimes feel like selling at a discount, especially if the business has the potential to grow more in the future under your leadership.
• Costs and commitments in the sale process: It’s also worth noting that selling isn’t as simple as handing over the keys and cashing a cheque. The process can be time-consuming and costly. You may need to pay a business broker’s commission, legal fees for contract preparation, and accounting fees to sort out finances. During negotiations, you’ll likely be required to disclose detailed information and undergo due diligence checks. This can distract you from actually running the business for months. Furthermore, sale agreements often include warranties or “earn-out” clauses, where part of the price depends on future performance, meaning some of the risk or responsibility might linger for a while even after you think you’ve sold.

No discussion about selling a business is complete without touching on tax and legal considerations. In Australia, selling a business can trigger various obligations; however, with good planning, significant tax concessions are also available. When you sell a business, or shares in a company that owns a business, any gain in value may be subject to Capital Gains Tax. The gain is essentially the difference between your sale price and the amount you originally invested. For small business owners, there are generous CGT concessions if you qualify as a small business entity. Generally, if your business’s annual turnover is under $2 million, or your total net business assets are under $6 million, you can access these concessions. They include:

• 50% general CGT discount: If you’ve owned the business assets or shares for more than 12 months, you’re usually eligible. This is available to individuals and some trusts. It means only half the gain is initially taxable.
• 50% active asset reduction: On top of the general discount, small business owners can often reduce the remaining gain by another 50%, so you’re down to 25% of the original gain taxable as long as the asset sold was an active business asset.
• Retirement exemption: This allows you to exclude up to $500,000 of capital gains from tax over your lifetime. If you’re under 55, the exempt amount generally needs to be paid into a superannuation fund to qualify. If you’re 55 or older, you can take it tax-free without making any super contributions. Essentially, for many older business owners, a significant portion of the sale can be tax-free under this rule.
• 15-year exemption: If you’re over 55 and have owned the business for at least 15 years, you might be able to sell the business entirely tax-free. This is a special concession for individuals retiring after long-term ownership.

With all these concessions, it’s actually possible that you pay little to no tax on the sale of a qualifying small business. For example, many of my clients walk away with the vast majority of the sale price in their pocket, especially if they plan. However, it’s crucial to get professional tax advice to navigate these rules; there are specific eligibility conditions and paperwork required.

In many cases, the sale of a going concern, which is an operating business with all its assets, can be structured to be GST-free, provided certain conditions are met, such as the business being sold as a going concern and both parties agreeing in writing. It’s something your lawyer or accountant will ensure is handled correctly so neither side pays unnecessary GST. The structure of the sale, specifically whether it is an asset sale or a share sale, will also impact your tax outcome and legal process. Selling the company shares means the new owner takes over the company, with all its assets and liabilities, whereas selling just the business assets means you retain the company shell but transfer the operations. Each has different tax implications and legal steps, so this is a big item to discuss with advisers.

Beyond tax, there are other legal obligations when selling. You’ll need a proper sale contract, often prepared by a solicitor, to document the terms of sale, any training or transition assistance you’ll provide, and clauses like non-competition. Buyers usually want assurance you won’t open a rival business next door next week!

If your business has employees, you must decide whether the staff will be transferred to the new owner or receive a payout. Employee entitlements, such as accrued leave or redundancy, if applicable, may need to be paid or accounted for in the sale. You should also ensure compliance with any applicable privacy laws when sharing information during due diligence and obtain the necessary consents for transferring leases, contracts, or licenses that the business relies on. These steps are essential to “finalise your tax and legal obligations” so you can hand over the business cleanly and not have liabilities boomerang back to you later.

All of this might sound daunting, but don’t be discouraged. The key is to engage professionals early, ideally an accountant and a commercial lawyer, to guide you through the process. They’ll help you structure the deal in a way that’s compliant and tax-effective, making sure you keep as much of that sale price as possible.

Before I conclude this article, I would like to include a disclaimer:
This discussion is general in nature. Every business is different; always seek personalised advice from qualified professionals regarding the sale of your business and the relevant legal/tax implications.

Okay, with that out of the way, ultimately, the decision to sell your business comes down to a mix of financial and personal goals. From a numbers standpoint, carefully evaluate whether the offer on the table truly compensates you for the income and value you’d be giving up. On the personal side, consider your readiness to exit: Are you emotionally prepared to let go? Do you have a clear plan for life after sale?

As your accountant, my role is to lay out these pros and cons objectively. I’ll crunch the figures, point out the tax and legal checkpoints, and help you see the whole picture. In our hypothetical office chat, I might say:

“Yes, $900,000 is a lot of money, but let’s remember what the business gives you each year and what it could be worth if you hold on a bit longer. Why are you considering selling now? Do you have another goal in mind, or are you just surprised by the offer?

Let’s ensure that if you do sell, it’s for the right reasons and the right price.”

In the end, there’s no one-size-fits-all answer. Some business owners feel immense relief and satisfaction after selling, while others realise they sold too soon or too low. By weighing the financial trade-offs, you can make an informed decision. Remember, opportunities will come and go, but you want to walk away from your business, now or later, on your own terms.