WSC News - October 2009

For many small business owners, their business is their largest asset and for many, one that is expected to help fund their retirement. We take a look at what your business is really worth and what sets a high-value business apart.

Irrespective of whether you are contemplating retirement or have many years ahead of you in business, every business owner is curious about just how much their business is worth. 

For every business that sells for an attractive price, there are many that struggle to sell, let alone fetch an attractive price. With the average age of business owners increasing and fewer new entrants looking to buy existing businesses, the sale price of many businesses is likely to come under pressure.

When you come to sell a business the first question is – what are you selling? In most cases, this is fixtures and fittings, plant and equipment, stock on hand, and the goodwill of the business.  Generally, a buyer won’t want to purchase your liabilities or your business structure, nor will they want to collect your outstanding debtors.  Most business sales become a sale of business assets.

These assets are relatively easy to value with the exception of the goodwill. The value of plant and equipment, and trading stock, can generally be agreed.  The tension is usually around the value of the goodwill.  This is because goodwill is made up of many intangible assets – things that you can’t readily quantify. This can include the value of:  the business name; the customer list; the income stream generated by the business; your location and lease on premises; your brand value; franchise or distribution rights; your operating systems; advertising; and, supply agreements.  And the list goes on. 

We can all agree that there is value in these assets but the question is, how much? Goodwill is basically the value of the future cash flow of the business.  Based on how your business is structured, it is the value of the profits the business can generate in the future. This is what a buyer is prepared to pay for. If a buyer has a reasonable certainty of profits and free cash flow in the future, then this is worth something. By comparison, a start up business will have a higher level of risk and no certainty that profits can be generated.  In fact, a new business may need to trade for a number of years at a loss before it can establish itself and generate profits.  Goodwill is what you are prepared to pay to avoid the risk and ‘time to establish’ factor.

What Influences Business Value and What Will People Pay For?

1. A history of profits, profits, and more profits
2. Returns on capital invested better than 30%
3. Strong growth and growth prospects
4. Brand name and value
5. A business not dependent on the owners
6. A strong customer list
7. Monopoly income – exclusive territories
8. A sustainable competitive advantage
9. Good systems and procedures

It is possible to get a price that is widely different from the norm.  Unique businesses, unique circumstances, and unique opportunities can always produce ‘an out of the box’ price.  If you can build something special, then you may achieve a price beyond normal expectations.  At the end of the day, the market will set the price.  If you are planning to sell your business, be aware of who your buyers might be.  There could be someone out there who is prepared to pay a big premium to own your business.  And, even if you are not thinking about selling your business, the reality is that one day you will be.  If you build your business with this in mind, then you should be looking to do those things that will grow your business value from year to year.

Where possible, the sale of your business should be mapped and planned three to five years in advance of the business sale.  When assessing the value of a business, the majority of purchasers will look for established trends.  This means seeing business performance reflected in the financial statements over a number of years.  Most buyers and their advisers will want to review the financial performance of the business for at least the past three years.  So, if you are making changes to enhance the business value then ideally these changes will show themselves over a sustained period. Where you can only show improved performance over one year or in the forward budgets, then there will always be a level scepticism that this is an aberration, or that the improvement has been artificially created in some way. Irrespective of the conclusion, a higher level of discount to the result will generally be applied.

If you want to find out more about how to prepare your business for sale, or would like to know how much your business is worth, talk to us today.

Have You Recently Renovated, or are Considering Renovating Your Rental Property?

If you are planning on renovating your investment property, before you talk to an architect, interior designer or builder, first call in your quantity surveyor.  Property investors are missing out on thousands of dollars in legitimate tax deductions because they are not claiming the residual write-off allowance on items before they renovate.

What is the Residual Write-Off Allowance?

As long as your property was built after 1985, the residual value allowance relates to capital works deductions on a property you are about to renovate.

It is specific to capital works items, which are depreciated at a rate of 2.5% per annum based upon the original cost over 40 years. It includes items such as bricks, windows, kitchen cupboards, tiling, shower screens, balustrades, light fixtures and taps.

If you are planning on renovating your property, before you demolish any capital works items where the original cost is unknown, get your quantity surveyor in to assess the residual value.

Case Study Example

Jack bought an investment property which was built in 1989.  The original kitchen and bathroom are in desperate need of a makeover to meet market expectations.
Without an independent estimate by a qualified quantity surveyor, Jack's tax deduction in regards to this renovation would be zero.  Here are the potential deductions he is missing out on.

• When Jack finishes his new kitchen and bathroom he can start claiming depreciation on those items at 2.5% again.
• Jack demolished these items voluntarily and was still able to claim the amounts in full.
• The property was built after 1985 - that's the year the ATO allowed investors to claim the building allowance.

Understanding Your Business’s Cost Structure

Do you know what your real cost of doing business is?  Your break-even point is the level of sales activity where your business is neither making a profit or a loss.  You calculate your break-even point by dividing your fixed expenses by your gross profit margin.  This figure represents the level of sales income you need to break-even.  With this piece of information you will know, at any time, whether or not you are profitable (providing your fixed expenses and profit margin have remained constant).

Not only will your break-even point assist you to monitor business performance, it’s critical when deciding whether or not to offer a discount.  If your break-even point is well below your current operating level then you have a good buffer in your profits to manage growth, invest in further capital opportunities, and to protect yourself against any sudden downturns in operating performance.  And before you say “I know that” ask yourself how many people actually put this theory into practice.  Even some of the largest businesses have been caught out on this one and tie up valuable resources in unprofitable projects and products.

Putting up your prices during the down times is not an act of social betrayal.  If your prices have increased you should flow these through unless you are comfortable making less for the same amount of effort, or you are in an industry that is so price sensitive that you have no choice but to follow the crowd like spawning salmon.

Employers Must Make Employee Super Contributions by 28 October 2009

Employers must make super contributions for the quarter ending 30 September 2009 to a complying super fund or retirement savings account by 28 October 2009.

They must contribute:

• At least 9% of each employee’s ordinary time earnings
• The total amount owed for the quarter.
The employer will have to pay the super guarantee charge (SGC) if they do not pay enough or they pay late.
Then they must:
• Pay the charge to the ATO by 1 December 2009.
• Lodge the Superannuation guarantee charge statement – quarterly (NAT 9599)
Employers who have made a late contribution to a super fund for an employee may be able to offset that payment against the amount of super guarantee charge they have to pay for that employee.

The SGC is not tax deductible.  Employers who claim the SGC as a deduction in their income tax returns may have to pay a penalty on the amount they claim.

Changes to the Definition of “Income” Could Affect Various Tax Concessions and Obligations

From 1 July 2009, the definition of “income” will change to include Reportable Superannuation Contributions and, in some cases, Investment Losses which will affect some or all of the following concessions, obligations or benefits:

a) Certain Tax offsets such as Dependant tax offset, Senior Australians tax offset, Pensioner tax offset, Mature Age Worker tax offset, and the Spouse Super Contributions tax offset;
b) Eligibility for claiming deductions for personal super contributions;
c) Eligibility for the government’s super co-contribution;
d) Obligations to pay the Medicare levy surcharge;
e) Obligations to make Higher Education Loan Program (HELP) repayments; and
f) Certain Centrelink benefits.

The Income Test reforms will particularly affect individuals who have negative geared properties and also arrangements involving salary sacrificed superannuation contributions.  Prior to July 2009, these contributions were effectively not assessed as “income” for means-testing of the above tax concessions, obligations or benefits.

“Reportable Superannuation Contributions” (RSC’s) are the sum of:

1) Personal (Individual) Deductible Superannuation Contributions; and
2) Reportable Employer Superannuation Contributions (RESC’s).  RESC’s will include contributions made under the super guarantee law as well as salary sacrificed super contributions.

For the purpose of assessing eligibility to the Senior Australians Tax Offset, Pensioner Tax offset, Medicare levy surcharge, HELP repayments, and a number of Centrelink and Family Assistance Office benefits, “income” will now include RSC’s and net investment losses.  However, for the purpose of assessing eligibility to other tax offsets and concessions mention above, “income” will only include RESC’s.

An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.