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A Going Concern Sale Can Save A Deal · My Accounting Advantage

• 0:01
  SPEAKER_00: Hello and welcome back to the podcast My Accounting Advantage.
• 0:05
  SPEAKER_00: My name's Lee Woodward, and joining me today for our brand new topic of the week, which is selling a business or a commercial property.
• 0:14
  SPEAKER_00: Do not ignore the going concern rules.
• 0:18
  SPEAKER_00: This is definitely going to take our accountants, the brilliance of My Harris.
• 0:22
  SPEAKER_00: Mai, welcome back.
• 0:23
  SPEAKER_00: Thank you, Lee.
• 0:24
  SPEAKER_00: Very exciting topic.
• 0:26
  SPEAKER_00: Yeah, well, we've had some good weeks about selling businesses, but commercial property and a business come into their own way that you have to think about doing it.
• 0:36
  SPEAKER_00: So take us into this because a going concern is simply a profitable business, a successful business, or building with a tenant.
• 0:45
  SPEAKER_00: Yeah.
• 0:45
  SPEAKER_00: What do we need to know about that?
• 0:47
  SPEAKER_01: Yes, so going concern arrangement is the terminology that I've been asked a lot lately because a lot of businesses are looking at selling and also signing contracts, and that word comes up 10 out of 10 all the time.
• 1:04
  SPEAKER_01: Why is that?
• 1:05
  SPEAKER_01: Because it's actually on your contract, whether or not you sell the business under a going concern arrangement, or whether or not you are selling your commercial property under a going concern arrangement.
• 1:19
  SPEAKER_01: So let's go through what going concern arrangement means.
• 1:23
  SPEAKER_01: So it means that you are selling an income-producing activity that can continue immediately after settlement.
• 1:32
  SPEAKER_01: It means that you are selling an asset that is a turnkey asset.
• 1:38
  SPEAKER_01: So the buyer can just jump in and operate it as it is.
• 1:44
  SPEAKER_01: Nothing changes.
• 1:46
  SPEAKER_01: So it has everything that they need to operate the business day to day.
• 1:52
  SPEAKER_00: So we own a donut shop, the property's the business has been sold, it's settled.
• 1:57
  SPEAKER_01: Yeah.
• 1:57
  SPEAKER_00: And the next day we're making donuts.
• 1:59
  SPEAKER_01: That's right.
• 2:00
  SPEAKER_01: And you're just selling a lot of donuts as per usual.
• 2:04
  SPEAKER_01: So nothing changes because you provided you're selling them the business that is turnkey.
• 2:12
  SPEAKER_01: It has staff, it has all the equipment it needs, and it has the intellectual properties, like, you know, um websites, systems, phone numbers, etc.
• 2:25
  SPEAKER_01: So the owner can the new owner can just come in, change a name, maybe, you know, under a new management, whatever, and just keep making money.
• 2:36
  SPEAKER_00: Love it.
• 2:37
  SPEAKER_00: So what's the challenge?
• 2:40
  SPEAKER_01: So the challenges here is you just got to recognize if you are selling um business, we'll go through business sale first.
• 2:49
  SPEAKER_01: So whether or not you are selling a business under a going concern arrangement, why is it important?
• 2:56
  SPEAKER_01: It can be very important because it will have a GST implications.
• 3:02
  SPEAKER_01: If you are selling the business and um it's a turnkey business and is qualified as a going concern, so you potentially don't need to charge GST on the sale of the business, and the buyer doesn't need to pay the GST either.
• 3:24
  SPEAKER_01: But there's a checklist that you have to go through in order to satisfy the going concern arrangement assessment.
• 3:32
  SPEAKER_01: You need to understand that your business isn't it's operating and the business can continue trading until settlement, and everything that the buyer needs to run the business will be transferred.
• 3:47
  SPEAKER_01: So basically, for example, if you are selling the business and um they have the right system in place that's all transferred to the buyer, customer database, plan and equipment, the lease, which is really important, you are registered for GST, and the buyer also registered for GST, and there is a going concern clause which is included in the contract, everything's ticked off.
• 4:17
  SPEAKER_01: So you are okay to sell the business under a going concern arrangement, which means that no GST applies.
• 4:27
  SPEAKER_01: And that can be a very big deal.
• 4:29
  SPEAKER_01: If you're selling the business for a million dollars, for example,$100,000 worth of GST could take a hit on the buyer's cash flow and that could sink the deal.
• 4:41
  SPEAKER_01: So in this case, if you sell the business undergoing concern, nobody needs to deal with the GST component.
• 4:50
  SPEAKER_01: So that could be a win-win.
• 4:53
  SPEAKER_00: Just on this point, someone's selling their business, but we live in a very different world at the moment where finance, capital, and so forth isn't available as easy as it was.
• 5:05
  SPEAKER_00: How many people are you seeing doing a vendor finance where, okay, you can pay it off over one year in instalments, and that means the buyer doesn't have to go and get finance.
• 5:17
  SPEAKER_00: The seller has a buyer because there's not as many buyers around as you think in this world we live in today.
• 5:25
  SPEAKER_00: What's your thoughts on that?
• 5:26
  SPEAKER_01: That's quite popular.
• 5:28
  SPEAKER_01: Often I see the vendor finance come into play when um you are selling your business to an existing staff member, your key player in the business.
• 5:41
  SPEAKER_01: To me, it it's quite an interesting deal because it could be a win-win for you know your employee as well as you, because you construct a deal where you can be paid over three years, for example.
• 5:58
  SPEAKER_01: So that provides you with sustainable cash flow.
• 6:02
  SPEAKER_01: Also, it provides your potential buyer, which is your employee, internal employee, with a plan to pay it off over time.
• 6:12
  SPEAKER_01: That can be done, but the legal contract will need to be in place and there's got to be, you know, agreed terms and condition.
• 6:21
  SPEAKER_01: Also, you need to determine whether or not there will be commercial interest on that amount that you are actually offering as vendor finance.
• 6:32
  SPEAKER_00: My, we discussed this in episode 22, but I just wanted to reconnect it to this one.
• 6:38
  SPEAKER_00: The benefit of a principal-only loan to the purchaser could be the reason they're buying it.
• 6:45
  SPEAKER_00: Yeah.
• 6:45
  SPEAKER_00: Because to go to the bank, get it, put it against their house, no.
• 6:50
  SPEAKER_00: But if we've got this arrangement and you're the buyer, you have this opportunity.
• 6:56
  SPEAKER_00: However, some people may be thinking, Oh, do I take it as income because I'm dodging something?
• 7:00
  SPEAKER_00: Or just re-clarify that for us.
• 7:03
  SPEAKER_01: Okay.
• 7:04
  SPEAKER_01: So basically, you need to clarify that um whether or not you're going to be taking the loan repayment as income, or it's simply a loan repayment, which is taxed differently.
• 7:19
  SPEAKER_01: So, in simple terms, if you already sold the business to um, say, one of your employees, the transaction would have taken place when you sold it, when you exchanged the contract of business sale.
• 7:36
  SPEAKER_01: And that would be the most tax-effective way to do it, because you'll be eligible for a lot of the, well, there's there's several CGT discount that you can apply, but um, that it depend is depends on the assessment that we do for you.
• 7:55
  SPEAKER_01: So I won't go into that again.
• 7:57
  SPEAKER_01: If you were to sell with the vendor finance, the tax implications is already taken care of at when you sold the business, when you exchanged the contract.
• 8:09
  SPEAKER_01: And subsequently, when you're actually receiving the loan repayment from um the buyer, that is not taxed.
• 8:20
  SPEAKER_01: It's actually not a taxable income to you.
• 8:24
  SPEAKER_01: So the income that you are receiving, they're actually not income.
• 8:28
  SPEAKER_01: They're just simply loan repayments.
• 8:30
  SPEAKER_01: So I'm not quite sure if that's No, that's great.
• 8:33
  SPEAKER_00: It perfectly answers the reason.
• 8:36
  SPEAKER_00: And then for the seller, I've got this money coming in every month, yeah, which is my money coming in every month that I can do whatever I wish, I can have time out, I can breathe.
• 8:48
  SPEAKER_00: Bringing a sale together today is very different to yesterday.
• 8:52
  SPEAKER_00: Yeah.
• 8:52
  SPEAKER_00: And my why is that?
• 8:54
  SPEAKER_00: We see so many businesses not go well.
• 8:58
  SPEAKER_00: I I know when I'm in Melbourne, I can walk past all these expensive fit-outs and they're for lease.
• 9:04
  SPEAKER_00: So someone's put a lot of money to get something off the ground brand new.
• 9:08
  SPEAKER_00: Whereas if something's established, it's been going a long period of time.
• 9:12
  SPEAKER_00: I remember when I worked on the Northern Beaches, there was a great chicken shop, and that got sold.
• 9:17
  SPEAKER_00: Yeah.
• 9:18
  SPEAKER_00: And the great chicken shop, the new guy came in and thought he'd renovate everything and change everything, and it was never the same.
• 9:24
  SPEAKER_00: And it didn't go well.
• 9:25
  SPEAKER_00: Sometimes there's a little formula there that just needs to keep going, hence an ongoing concern.
• 9:30
  SPEAKER_01: Yes, that's right.
• 9:31
  SPEAKER_01: So um that's a lot of value there.
• 9:34
  SPEAKER_01: Especially, you know, it's like a recipe, you know, when you um cooked something with a certain recipe, like cake, for example, if you don't follow recipe, they flop very quickly.
• 9:46
  SPEAKER_01: So you need to follow the recipe and then you're just twigging it slightly.
• 9:52
  SPEAKER_01: You don't need to reinvent the wheel for something to work.
• 9:56
  SPEAKER_01: So it's just the recognition of what you are buying and don't just go and change it.
• 10:03
  SPEAKER_01: And that's the same.
• 10:04
  SPEAKER_01: Like I had many business owners who are very ambitious.
• 10:08
  SPEAKER_01: For example, I was acting for a gym and um they took over, you know, um not so profitable gym.
• 10:17
  SPEAKER_01: They thought, okay, um, we're going to make it something completely different.
• 10:22
  SPEAKER_01: So they went in, they took everything out, yep, and it became a hole in the wall, and then they chuck everything out and they put in all the new um fixtures and fittings, spent so much money, and I said, uh, have you tested the market yet?
• 10:40
  SPEAKER_01: Wouldn't you just twig it a little bit so that you're not pouring all this capital into it without testing the market?
• 10:49
  SPEAKER_01: Oh, too late now.
• 10:50
  SPEAKER_01: I've just put in$300,000 and um, you know, it'll be right.
• 10:55
  SPEAKER_01: It it worked everywhere else.
• 10:57
  SPEAKER_01: Unfortunately, six months later, they were forced to close the door because it didn't quite work the way they hoped.
• 11:06
  SPEAKER_01: But at the same time, they were so disappointed that um they're waving a white flag and didn't want to continue.
• 11:15
  SPEAKER_01: So that's again, you know, um putting emotion into it, and they're simply closed.
• 11:22
  SPEAKER_01: It's not not a good way to go.
• 11:24
  SPEAKER_01: So to me, understanding what you're purchasing and then um if you see that you can improve, make a gradual improvement rather than um, you know, just trying to revamp the whole thing because you don't really know if um it just needed a little twigging for the the revenue to increase.
• 11:46
  SPEAKER_00: That is such valuable advice and study the customer.
• 11:50
  SPEAKER_00: Everyone's got this illusion of I know what's gonna work and this is what I'm gonna do and this is how it's gonna look.
• 11:57
  SPEAKER_00: That's just your thoughts.
• 11:58
  SPEAKER_00: Yeah.
• 11:58
  SPEAKER_00: And definitely I I'm saying have vision, I get that, but ask the customer what would they pay for?
• 12:05
  SPEAKER_00: Do they need that and and what do they value?
• 12:08
  SPEAKER_00: And quite often we are wrong because the customers coming from I'm the person paying you the money.
• 12:13
  SPEAKER_00: This is what I value the most.
• 12:16
  SPEAKER_00: And looking at that, it looks a bit flash for me, and I'm not paying for that.
• 12:20
  SPEAKER_00: I just want a normal gym where I can go in, feel comfortable, and get out of there.
• 12:24
  SPEAKER_00: My, let's go into the commercial property situation.
• 12:27
  SPEAKER_00: Yeah.
• 12:28
  SPEAKER_00: Take us into that.
• 12:29
  SPEAKER_01: Yeah.
• 12:30
  SPEAKER_01: Going concern arrangement for selling a commercial property is slightly different to if you were to sell a business.
• 12:39
  SPEAKER_01: So with a commercial property, it would be under a going concern arrangement if it has an existing lease in place.
• 12:47
  SPEAKER_01: Tenants will remain in the premises until settlement and rent is being collected.
• 12:54
  SPEAKER_01: So basically, what it means is that, you know, there's a uh commercial lease and there's a renter, and when you complete the purchase, everything continues.
• 13:06
  SPEAKER_01: So that's when you won't have to deal with the GST implication.
• 13:11
  SPEAKER_01: But you've got to make sure that you market on your contract that um, you know, you're selling under a going concern arrangement, you are registered for GST and the seller also registered for GST.
• 13:24
  SPEAKER_00: My another great podcast, but give us your closing thoughts on this topic.
• 13:30
  SPEAKER_01: Yeah, so my closing thought on this topic, it would be that if you are buying or selling a business or, you know, commercial property, make sure you understand the GST implication before signing a contract and also asking yourself that question Am I selling under a going concern arrangement?
• 13:53
  SPEAKER_00: Another wonderful week.
• 13:54
  SPEAKER_00: I look forward to next week.
• 13:56
  SPEAKER_00: My Harris, My Accounting Advantage.
• 13:59
  SPEAKER_00: Thank you for joining us.
• 14:00
  SPEAKER_00: Thank you, Lee.