Sell Smart, Exit Strong

This episode tackles one of the biggest questions business owners face: How do you sell a business and keep more of what you've worked so hard to build?

Mai and Lee are joined by local business owner, Chef Daniel, who steps into the guest seat to ask the questions many business owners are already thinking about. Together, they unpack the tax implications of selling a business, recent changes to Capital Gains Tax (CGT), the importance of planning well before an exit, and why your accountant should be one of your most trusted advisers throughout the process.

In this episode, they talk about:

• What recent Capital Gains Tax changes mean for business owners considering a sale
• The different types of CGT exemptions available to small business owners
• How capital gains are calculated when buying and selling a business
• The Small Business Rollover concession and how it can help when purchasing another business
• The importance of profitability, clean financial records, and consistent performance
• Why emotional attachment can impact business valuation and sale decisions
• How to choose an accountant who aligns with your personal and business goals
• Where AI tools like ChatGPT can assist business owners and where professional advice remains essential
• Why every business should be built with an eventual exit strategy in mind

Whether you're preparing to sell in the next 12 months or simply want to build a business that has long-term value, this episode highlights why planning early can make a significant difference to the outcome.

If you're considering selling your business, reviewing your structure, or would like advice on the small business CGT concessions available to you, our team at www.myaccountingadvantage.com.au is here to help.

Have a question you'd like Mai to answer on a future episode? Submit it through the Ask Mai link at the top of the show notes.

Learn more about My Accounting Advantage

Disclaimer

The advice contained in this presentation is general in nature only and should not be acted on without first seeking professional advice.

Your personal circumstances have not been taken into account, and you should consider the appropriateness of the advice to your individual needs.

Transcript

Welcome And Why Exits Matter

Speaker 1 0:01

Hello and welcome back to the podcast My Accounting Advantage. My name's Lee Woodward, your coach and host, alongside the incredible Mai Harris. So, as promised last week, we're bringing in a real business owner with real business questions to ask Mai all the questions you need to know as a business owner if you were considering preparing your business for sale and getting that exit right. And our real business owner is no stranger to the TV shows and the radio world. Chef Daniel, welcome aboard. Thanks for having me. So good to have you with

Chef Daniel’s Business Background

Speaker 1 0:38

us. Just for our listener that doesn't know you, tell us your background in your world.

Speaker 2 0:42

Chef Daniel is what uh everybody in the local community knows me as. I've had a catering company for about 19 years. I've had a restaurant for seven. I've been cooking for going on to 25, almost 30 years now, so getting a little bit old. But I've been in the hospitality industry all my life. It's the only thing I really know. That's basically where I'm at at the moment. I do a lot of stage productions, cooking shows, celebrity chef stuff these days that you have to do to stay in the hospitality world and stay relevant to um common day.

Speaker 1 1:10

Now, you're actually on Married at First Sight at the moment, you're catering for that. Uh, you're not dating, you you you are feeding people.

Speaker 2 1:17

Yes, I'm behind the camera, not on the camera. I'm not walking down the aisle. Yeah, uh, so uh we've got some clients, such as um the people that do Married at First Sight or Farmer Wants a Wife and things like that. So, yeah, it's uh a great little uh catering company that we've built over the years, and uh as time progresses, it's becoming a lot more interesting.

Speaker 1 1:36

Where we are on the program is lots of people are considering selling their business. The laws have changed, the government's changed. So we're gonna let you ask Mai some questions. We're gonna flip it over and make you the DJ here. Awesome. And Mai's gonna answer all your questions around what you need to know in preparing your business for sale and any concerns that you would have out there as a business owner. And over to you and Mai, welcome back.

Speaker 2:02

Welcome to the show, Chef Daniel.

Speaker 2 2:04

Thanks for having me. And thank you for taking the time to answer the questions that really every small business needs to know.

Speaker 2:09

Yeah, I'm looking forward to it.

CGT Changes And Key Exemptions

Speaker 2 2:11

Well, first of all, one of the biggest questions I think I've been asked a lot about is how does capital gains tax at the moment jeopardize the sale, or do I need to put a little bit extra to make sure that the taxes kind of get covered?

Speaker 2:25

Yeah, that's a very good question because there's it's been on people's mind after the you know the federal budget announcement because of the abolition of the 50% CGT discount. But what you need to understand is it's the the rule that has been abolished is only a 50% general 50% CGT discount, not all of it. So there are three more CGT discounts that you can be eligible for when you do sell the business. So number one is the 15 the 15-year CGT exemption. So what that one does is eliminate all of the capital gains from the sale of um your business. And to be eligible for it, you need to have the business and run the business for at least 15 years. So you would be eligible um for that if you, you know, established the business um from 2011.

Speaker 2 3:31

So for example, my catering company is eligible. My restaurant's about eight years away.

Speaker 3:37

Yeah. So basically how the first question would be: if it was you that um to sell the business, how did you run your restaurant? Is it from the one entity, or it's actually the one entity that covered both the catering business and also the restaurant business? So if it's a separate legal entity, yeah, they're two completely separate. Yes. So that's basically answer the question of yes, um, you've been running the catering business for at least 15 years, so you can sell that portion out and um and apply that 15-year CGT um exemption.

Speaker 2 4:17

Basically, also what you're saying is if I've had a business for 15 years, but I change the name, for example, halfway through, then I won't be eligible if uh it needs to be trading in the same entity with the same business name for 15 years.

Speaker 4:34

Not entirely. So basically, if you transition, for example, from Soul Trader into a company, for example, if we can, you know, apply the rules and then tick all the boxes in terms of the ownership period and how the business continuity being assessed, you can possibly be eligible for for that exemption still. Yeah, so it's part it's basically part of the assessment process that you need to go through. So the second one is the um 50% CGT discount on active asset. So what this rule does is it's still applicable. It hasn't been stopped by the federal government. And you but the rule is that you you are selling an active asset at the time. So what is an active asset? An active asset is an asset that generates income for you. For example, if you're selling a business, goodwill is actually qualified as an active asset. Yeah. So it's like your IP, your intellectual property, also is an active asset. So when you do sell your um business, you need to identify that yes, um, is it qualified for the 50% um active asset CGT discount, because that can be quite a game changer and it will save you a lot on capital gains tax. Before the federal budget came about and um stopped us um from using the general 50% CGT discount is we used to be able to, for example, apply the 50% general CGT discount first. For example, you uh sold the business for $100,000. So the 50% um general 50% CGT discount eliminated half of that. So you're being you will be assessed on $50,000. So you don't pay tax on the the other $50,000.

Speaker 2 6:48

So this kind of brings me into like almost the next question. Yes. Is

Cost Base Explained With Simple Numbers

Speaker 2 6:53

for example, if I was to buy a business for $100,000 and I was to sell it at $200,000, or I was to start a business from scratch and sell it for $200,000, where does the whole tax thing come in? Does it come into a profit margin? Does it come in with the overall sale? Like how for people that don't understand how and where does tax exist on a sale of business?

Speaker 7:19

Yeah. So if you were to buy a business for $100,000, that is actually your cost base. That's what you pay for the other business goodwill. So that's your cost base. Let's just say you operate the business for three years and you sold the business for $200,000. That's your proceeds from the sale. So your capital gains will be $200,000 minus your cost base, which is $100,000. Because we can't apply the 50% general CGT discount anymore. That's been it's not a thing from 1st of July 2027. And assuming that you sold the new business after that date. So what would happen is you st you you can't use that CGT discount anymore, but you can use the 50% active asset CGT discount. That is still a thing for small businesses. And so you apply that. So your capital gains of $100,000 will be now taxable, $50,000. There's another two um CGT rules that you can also look into whether or not you are eligible to apply to that gain of $50,000. It could eliminate the um entire gain first. How that gain is being taxed is that $50,000 will be taxable under whatever entity that you are using. And for example, if it's you that you personally sold the asset, so it'll be, you know, the income of $50,000, um, capital gains will go on top of your taxable income.

Retirement Exemption And Business Rollover

Speaker 9:05

However, if you want to apply another exemption, it's called retirement exemption. Everyone, like every taxpayer in Australia, is eligible for um a retirement exemption of up to $500,000 in there, it's a lifetime limit, which means that if you made a gain from the sale of an asset such as um business asset, you can roll it into super, that gain, and you don't pay any um tax on it. Wow, I guess. Yeah. So and it depends on your age as well. If you're actually over 55, you don't actually need to roll that gain into super. It can eliminate it.

Speaker 2 9:50

Let me get this right. If I was my current age, 40, yeah, and I am selling my business for $200,000 and I started it from scratch. Let's say I got taxed. What you're saying is I can actually then roll over, let's say, $50,000 or $100,000 of that into my super, and then therefore it helps me at retirement age. So if I do that five more times between before me now in retirement, I could put $500,000 away in my super.

Speaker 10:21

Yeah, you have a lifetime limit of $500,000.

Speaker 2 10:23

So suffer today to benefit tomorrow.

Speaker 10:26

Yeah, basically. But yeah, it's it's basically um you don't need that cash right now. Or on can use another rule. Um it's called small business rollover. So if you make that $50,000 gain and you want to buy another business, you can roll that gain into buying another new business. And because you applying that small business rollover, you using that gain to purchase another business, you can eliminate that gain as well.

Speaker 2 10:59

Yeah, wow. Overall, you're explaining something that I think a lot of small businesses don't really comprehend is you have to plan your exit and plan it with your accountants and plan also what happens after, let's say, a whole year after you've decided to sell the business. Let's say you take a couple of months, gap a year, but you're actually looking at purchasing another business. Yeah, you need to plan that before you come to sell your business. Yes. Now, on that note, how long should I make sure I prep my business in accounting world before I come to sell it?

How Early To Prep For Sale

Speaker 2 11:38

Because a lot of people go, I want to sell tomorrow. And then they go to their accountant, they go, You can't, it's worthless. Yeah, what do I do? Yeah. So, in your advice, how long should we prepare our business from an accounting and from a ledger books point of view before we come to sell?

Speaker 11:53

Okay. So what we normally do at my firm, we normally do the business due diligence. Okay, so what we as an accountant are looking for is basically your profitability for the past at least three years. So um ideally, three years. So we have a look at the books and the completeness of it. So you're, I'm sure, um, Daniel, that you familiar with giving uh financial statements every year your accountants prepare for you. Yes, so it has, you know, um profit and loss, balance sheet, notes to financials, etc. So first things first, we have a look at the financial history and it's a financial health check um of your business. And then we have a look at whether or not your revenue is consistent, you know, it might not be um so good in the first year, but you can see that it's improving each year and the profitability, that's right, and the profitability um and potential is there. So then we actually have a look at the net profit, gross profit, and um, so really, when do you want to prepare for it? It's all the time. Yeah. So um I always said this to my clients. I said, when you set up a business, you should have a view to sell your business in the future. Why would you put in this much time, effort, energy into building the business? It's not for but well, okay, it's for fun. But a lot of us will argue, right? That a lot of pain comes with it. Yes, definitely. Yeah, and a lot of risks.

Speaker 2 13:45

I think it's the emotional attachment that people need to disconnect from business.

Speaker 13:49

Absolutely. It is, it's a, you know, it should be an asset, income-generating assets that you look at and you do sell it when it's performing at the best, at its peak. So that's when it has the most value. So a lot of people wait until they basically they burn out. Yep. That's not the time to sell because you just want out. You just want to just run away.

Speaker 2 14:18

And even on that note, a lot of people come to sell on an emotional level.

Speaker 14:22

Absolutely.

Speaker 2 14:22

And they think that it's worth more than actually what it is. Yeah. So before you sell or before you think about selling, it is it wise to actually make sure that you have that strong connection with your accountant because they're going to dictate what the saleability of the business is because you're too emotional as the runner or the owner. You know, they they're emotionally tied into it too much. So

Choosing The Right Accountant

Speaker 2 14:46

if I was to start, if I was to say, let's say, look for a new accountant, because my current accountant's not doing the job, you hear these stories a lot, right? You hear these stories a lot. I haven't done books properly, my accountant hasn't done this. How do I choose the right accountant for me and for my business? And what are the telltale telltales of making sure that that accountant will actually achieve a goal for my family, me, and my business and things like that. Is there a little bit of a hints and tips that you could help us guide with?

Speaker 15:19

Yeah. So the formula that I follow always when I meet with a client on the initial client consultation is, you know, I sit down with um the client, I give them a sufficient amount of time, 30 minutes to an hour, and then we we have a chat. So it's a client um advisor relationship that is quite strong. And a lot of the time I outlast their marriage.

Speaker 2 15:44

Yes.

Speaker 15:45

So it's a pretty strong bond. And they then and you probably find that you want someone that have a good connection with you and will listen to you. And the first thing I ask is, you know, what are your goals? Because if I don't know that, I can't take you there. What's important to you? You know, what is important to you as your advisor? What would you like your advisor to do for you? So everyone's different. Some people want to concentrate on minimizing tax and they don't care about anything else. But some people just go, oh, um, well, I I want to pay tax so that I can borrow more money to invest, you know. So it's not all about minimizing tax sometimes. And and people have different goals. And I also said to other people, if you have a vision to, you know, do to do wealth creation, well, then you have to pay tax. I'm sorry. Yeah. Because otherwise you can't borrow if you don't show profit. A lot of the time people don't realize that. You know, they want to claim as much as possible. And I'm like, well, that's going to dampen your borrowing capacity. Contradicting. It depends on the person and their their vision about um, you know, when number one, what what do they want in life? What are their goals? What does financial freedom mean to them? And um, you need to ask yourself that question before you go to see an accountant. And and then they go, okay, well, I can align, you know, your advice and your tax journey with your goals to help you achieve that. Because a lot of the time when people come to me, they only just have a business. They don't have a wealth creation plans, they don't have a self-managed super fund, for example, and they're still renting, you know, a commercial property for their business. Perhaps they have enough in your in their super to set up a self-managed and buy a commercial property that they can rent from themselves. So the money doesn't really leave your side. It um it goes around in circles like this.

Speaker 2 18:00

So now I find this very fascinating, and I think a lot of business owners also need to understand one very important

Using AI Without Risking Mistakes

Speaker 2 18:07

thing. You as an accountant, as a client, I'm coming to see you. And we're going through, you know, wealth plans and super and things like that. In the world of AI and people asking for advice on Google and Chat GPT and Claude and things like that. What's your advice on how far that advice extends? Yeah, especially to the common day business owner, to actually visually touching an accountant.

Speaker 18:35

Yeah.

Speaker 2 18:36

What where where would you sit, where would you make people understand and really put the pressure on understanding? Do not take, I believe, do not take the advice of AI and go and see a real human because they're going to teach you more about understanding your future growth, your family's growth, your kids' plan, your retirement plan, um, over and beyond what ChatGPT says.

Speaker 18:57

Yeah. No, very good question. So basically, where AI lacks is the experience, the real -life experience, you know, and it can only read what's available and what information that are available out there, and it forms its own opinion and sometimes it goes daydreaming and um, you know, and then provided you with um maybe answers that not quite true. But it's a a bit of a double-edged sword with AI because it's actually making our jobs a lot easier. And at the same time, um it if you rely on it, you you're not verifying the answers that could put you in uh uh um hot water as well. So where I would use AI in this case is to um, you know, clarify your understanding. So use it as an information source. So if you want to do um or form a tax strategies and have you know initial questions, for example, do ask AI. You know, um, what does this mean if I do this? And um what is the, you know, we've talked about the 50% active asset um reduction that would be available for um the sale of active asset. What does it mean? You know, you can ask it and then um and then let it basically educate you from um like a surface level and then um also ask whether what questions should I ask my advisor when I go and see my advisor? But this is what I want to achieve, for example. So it will actually help you um form sets of questions and also provide you with the framework and be prepared for you know for the session with your advisor. So it could save you a lot of time and then save you a lot of money as well because you get to the point. That's right, when you when you go and see your advisor, you're not trying to articulate yourself and you know, you're trying to get to the point. So that's where I would use it. I would not make a decision.

Speaker 2 21:14

So use AI as a filter system before I go and see my financial advisor. Don't use it as my financial advisor. That's probably the biggest secret.

Speaker 21:24

That's my advice because it's not a reliable source. You know what I mean?

Speaker 2 21:29

Well, thank you very, very much. I think myself and a lot of other people out there would actually take a lot from what we've discussed, especially on the sale of business and especially getting closer to maybe if you've had the business for 14 years or 13 years, go and talk to your accountant, go and talk to your financial guys, and it might be worth saving onto it for two years. Or, like you said, 2027, new laws, new things are coming in place. Maybe the time to sell is now or in the next six months or so.

Speaker 21:58

So it's so important to just plan for the sale. Like I think at least 12 months before you um want to go out to the market, because what um you want your advisors to do is have a look at the way you're structured at the moment, because um it may not be what you think, because you know, like share structures and um whether or not you um the test person and you know for 15 um year CGT exemption, etc. So all of that needs to be assessed beforehand. And then if you give yourself a lot of time, we can just make changes.

Speaker 2 22:41

Better yet, if you're starting a business or you're looking at starting a new business, plan for the exit while you're starting it up. Don't feel like it's bad to actually make sure you're planning the exit, because I think one thing that's very important from what you've said is the narrative of the books is very, very important from the journey of the business, not just the story of how hard you've worked.

Speaker 23:04

Yeah, no, definitely, because that's that's what people measure your performance. You know, um, that's how people measure your performance with numbers.

Speaker 2 23:13

Numbers don't lie.

Speaker 23:14

That's right.

Speaker 1 23:15

Well,

Final Takeaways And Listener Invite

Speaker 1 23:16

Chef Daniel, great little DJ interview there. You got some great questions and straight from the heart and soul of being a business owner.

Speaker 2 23:24

And you know what, being a business owner, you kind of attract other business owners asking you all these weird and wonderful questions. And it's great to be able to have a podcast like this for you to be have the answers, you know, because it's very uh sometimes you walk into your accountant and you do feel a bit like a dummy, you know. Believe it or not, it's not uh irregular. And, you know, to get your kind of knowledge up to scratch before you walk into your financial advisor, uh, I think is very, very important.

Speaker 1 23:52

Well, I want to thank you for joining us and congratulations on everything you're doing, and we'll speak to you in the future. Pleasure.

Speaker 23:59

Thank you, Daniel.

Speaker 1 24:00

Well, Mai that was a different episode for us. A real live business owner getting their questions answered. Yes, I what a great part of our program.

Speaker 24:10

Love that one. Yeah, I think it's should happen more and more.

Speaker 1 24:14

Well, we have a wonderful button on our podcast where people can put through their requests, ask their questions, and if you want to come on the show, let us know. But, Mai, another great week. Thank you for joining us.

Speaker 24:26

Thank you, Lee.