Australia's manufacturing ecosystem is largely made up of small to medium enterprises (SMEs), most of which started with little resourcing and have grown through the trials and tribulations of economic, supply and labour challenges.

A manufacturer’s business is their pride and joy and the realisation of their hard work and ambition.

Letting go of this most prized possession is a complicated and sometimes messy journey for local manufacturers. According to professional services firm RSM, it is easy to underestimate the resourcing required to handle what often eventuates to be the most important transaction of someone’s life. The RSM team knows manufacturing, with strong accounting systems, process, and records and deep experience in the specifics of valuations, tax advisory and financial modelling in the manufacturing world.

Grace Bacon, partner in RSM’s Financial Services Division, helps clients with personal wealth planning – their own assets, superannuation and succession plans – working alongside the firm’s accountants and own tax advisors. “Business owners who are thinking about an exit strategy should be engaging with their financial and tax advisor upfront well before the transaction goes through,” Bacon said. “That way we can provide the expertise for the right strategy to exit the business gracefully with the least amount of stress as possible, while also avoiding tax implications.”

 This is broken down into four categories, Bacon explained.

15 year exemption: 

A business sale becomes tax free if the business has been owned for at least 15 years, you are aged 55 or older and the sale is in connection with the taxpayer’s retirement.

50 percent active asset reduction: 

This concession allows you to treat 50 per cent of the capital gain as tax free, meaning you are only taxed on the remaining 50 percent of the gain realised.

Retirement exemption: 

A capital gain can be disregarded up to a lifetime limit of $500,000. If you are under the age of 55 at the time you must contribute to a complying superannuation fund the amount of the gain you wish to disregard and treat as tax free. If you are over the age of 55, you do not need to contribute the funds to super and instead can take it as a tax free ETP payment.

Small business rollover: 

This allows the deferral of the capital gains realised from the sale of an active asset of the business where the proceeds are used to purchase a replacement asset or improve an existing one.

“It’s really important for business owners to understand which of these rules applies to them because they may be able to apply for more than one,” said Bacon. “This is where they need to speak to a tax and financial advisor to work out what is most appropriate for their circumstances. 

Once you’ve established the taxable capital gains component, then we can consider rolling it into superannuation, and be exempt from the tax liability.” Mark Nichols, RSM Business Advisory division director shed some light on the key considerations for exit planning – put simply, the business owner should establish and understand their own personal investment strategy, personal retirement strategy, personal super strategy and personal debt position and strategies. Once these are understood, it’s easier to know how their lives will be affected by the sale, including the tax implications, access to small business concessions and ability to contribute to super.

Where the sale has a CGT outcome the business owner should be aware of what their CGT position will look like, including whether they will have access to concessions on sale, noted Nichols.

“The tax outcomes of the sale will have a significant impact on net cash realised, which ties back to the business owners’ personal financial strategies and understanding that is critical.”

A business owner should consider their personal super strategy, and how that intersects with an impending sale. Are there opportunities to make additional superannuation contributions in advance of sale, concurrent with an individual’s tax and retirement strategy, this can be an effective strategy for all business owners, but particularly for older business owners nearing retirement. Contributions may be eligible for tax concessions, and the funds can be accessed upon retirement with potentially lower next tax outcomes for the business owner.

“For many business owners, the sale of their manufacturing business is the biggest financial transaction of their lives, the realisation of their life’s hard work, and is inherently tied to their financial and retirement strategies,” he said. “Engaging the services of a qualified tax advisor or accountant with experience in business sales transactions to help you plan for the sale, structure it effectively, to understand the tax outcomes, and then to help manage those post-sale is vitally important in ensuring that you generate the best outcome for yourself, and your family, from a business sale.”

Prior to the sale, it may be beneficial to restructure the business to optimise sale outcomes. For a manufacturer this could involve transferring assets, restructuring debt, or rearranging ownership structures. Careful planning and expert advice can help identify opportunities for better outcomes on the sale.

Oliver Gaunt is a principal in RSM’s corporate finance division, specifically in mergers and acquisitions. Having helped a number of manufacturers sell their business, Gaunt mapped out the elements integral to getting the best possible sale, and timing is everything.    

Capital investment in the business is a huge factor for manufacturing transactions.

“Owners may be reticent to invest in capital in the lead up to selling the business, but buyers want a business that’s well invested,” Gaunt noted. “If it looks like the buyer will have to outlay significant capital to maintain the existing performance of the business, they are likely to push for a reduction in the purchase price.”

An uptrend in trading and being able to sell a growth story are also crucial to driving up the price. Gaunt suggests that a strong year after the non-covid ‘normal world’ holds sellers in good stead. When dealing with the sale of a manufacturers life’s work, Gaunt said a well laid out plan can save emotional strain and damage.   
 

“Gradually handing over responsibilities in the business prior to a sale helps free up time to invest in the sale process, and reduces the adjustment once you exit ,” he said. “Having a good advisory team, accountants, lawyers etc. provides sellers with comfort that people are checking for pitfalls throughout the process.”

It’s never all about the business owner when it comes to selling a business. Staff can become family over many years of work together, combining skillsets to achieve a common goal. Rick Kimberley leads RSM’s Australian Global Employee Services practice, specialising in employment tax and expatriate tax. Whether it’s particular benefits such as cars or one-off payments to employees, it’s important to understand the tax implications. According to Kimberley, superannuation is one which often gets missed.

How we can help

Please do not hesitate to contact your local RSM advisor should you wish to discuss these topics further.

Find the original Manufacturer's Monthly article here: