Potential recessions have been a hot topic worldwide as many countries increase their interest rates to quell inflation—and it’s no different in Australia.
The Reserve Bank of Australia (RBA) recently hiked its cash rate (the inter-bank interest) rate target to 4.35% which is a 12-year high, making loans more expensive for businesses and consumers alike. At the same time, the Australian consumer price index is currently increasing at 5.4% so far in 2023 compared to the RBA’s inflation target of just 2 - 3%.
All of these macroeconomic challenges certainly impact the way businesses operate as costs increase while demand slows, leading to an overwhelming situation for many small business owners.
While the economic climate isn’t the only reason that businesses fail, it is a major contributor so it’s no surprise that many owners want to close their businesses and walk away. That’s why the goal of this article is to provide guidance on your exit options if you ever find yourself in a sticky situation.
In particular, we’ll cover:
- Whether you should sell your business or liquidate it.
- The factors you should consider to determine when to sell your business.
- How you can find serious and qualified buyers for your business.
Let’s start with the first point.
Why You Should Sell Your Business Instead of Closing It
Closing your business can be the right choice in certain situations, such as an impending insolvency.
What is insolvency? It’s when a business cannot pay its debts and faces bankruptcy. In this situation, it’s often smarter to get rid of the business as fast as possible as many buyers won’t want to take on such a high degree of risk.
However, in most situations, it may be better to sell it to a strategic buyer.
Here are four reasons why:
1. It can be more lucrative
Most of the time, liquidation results in less return on your investment as the people buying your assets are laser-focused on getting a good deal on that particular asset—no one will pay market value during a liquidation.
In contrast, when you sell the business whole, the value comes from the base value of your assets plus the potential for them to generate revenue during operations.
For example, a skilled entrepreneur would rather buy an existing business and optimise operations with an existing customer base than build from scratch as they would likely see a return on their investment much faster.
Selling doesn’t only result in more money in your back pocket, but it could also result in the same for your buyer.
2. It can simplify the exit process
Depending on the size of your business and its number of employees, it may be simpler to sell than wind down operations.
Closing a business means you need to deal with letting go of employees and sunsetting your customers, not to mention the other paperwork involved in de-registering your business. This can be tricky to manage as you navigate these uncomfortable conversations while operating a business.
While selling still requires a ton of paperwork, all you need to do is worry about finding a potential buyer and getting the deal across the line.
3. It offers a host of tax benefits
Selling an active asset qualifies you for a host of Australian small business tax benefits which can significantly reduce the amount of capital gains tax you have to pay on your exit.
The overall qualifying criteria is that your business either has an aggregated turnover of $2 million or less per year or a net asset value under $6 million. However, each exemption has its own additional criteria.
- 15-year Ownership Exemption: If you’ve owned your business for at least 15 years and are 55 years old or are otherwise permanently incapacitated, you can enjoy full capital gains reduction.
- 50% Active Asset Reduction: If you’ve held an active asset for at least 12 months, you can discount its capital gains tax by 50%.
- Retirement Exemption: If you’re aged 55 or older, you can receive a capital gains exemption up to a lifetime limit of $500,000.
- Rollover Exemption: If you sell an active asset, it’s possible to delay your capital gains tax for up to two years if you plan to roll your capital into a new business.
4. It supports business continuity
Customers and employees all rely on your business, albeit for different reasons.
When you liquidate, all your employees will have to find new jobs and customers will have to find a new supplier for certain products and services. This can be particularly stressful for everyone involved, especially if you work in the business-to-business space and sell something unique to your customers.
However, when you sell your business this can be avoided, allowing you to pass on the legacy and continue the business.
What Factors Should You Consider Before Closing or Selling a Business?
Whether you choose to close and liquidate your business or sell it to someone who will continue your legacy, you need to consider the following factors before exiting your business:
- Taxation: Remember the tax breaks above? These play a huge role in maximising your profit, so if you’re close to qualifying for one of them, it’s a good idea to hold off on your exit. On the other hand, if you plan to sell your business for less than $180,000 it’s a good idea to sell it as early as possible in the financial year to reduce the tax you pay.
- The State of Your Business: While it’s possible that buyers will be interested in an underperforming business, the bigger the performance gap, the less likely it’ll be possible to find a buyer. Although it can be difficult if you fall into this category, it’s a good idea to improve your business metrics before exiting to maximise your return.
- Economic Climate and Industry Trends: Is the industry itself experiencing a long-term decline? It may be a better idea to liquidate your business as there will likely be low demand from buyers. On the other hand, if Australia as a whole is experiencing a recession, postponing your sale may be the right choice.
- Your Exit Timeline: If you want (or need) to exit quickly, liquidating your business will be the smartest move. However, if you have time to wait for the right buyer, selling the business as a whole will likely result in a better return.
However, if your business is failing, there are other additional factors to consider before selling your company.
What is the difference between selling and closing down a business?
Selling a business involves finding and negotiating with a buyer and then ultimately transferring ownership of the business. On the other hand, closing down a business involves ceasing operations, employee layoffs and the deregistration of a company.
When should you walk away from a small business?
You should consider walking away from a small business when:
- You’re no longer passionate about the industry or growing your business.
- It no longer makes financial sense to continue running the business.
- The industry is facing long-term declines.
- The stress of running the business outweighs its rewards.
What are the disadvantages of closing down a business?
While closing a business is arguably the fastest way to exit a business, there are some disadvantages. Namely, awkward conversations when letting go of employees, financial losses from selling assets at a discount, and the emotional impact of winding down a business that you’ve worked hard to build.
What are the advantages of selling a failing business?
Selling a failing business can provide many advantages over a liquidation including employee job security, brand continuity, tax benefits, a simpler exit process and an increased return on your investment.
The Bottom Line: Sell, Don’t Close
In the majority of cases, it’s simply better for small business owners to sell a business instead of closing it.
Selling ensures that your employees continue to have jobs (as long as it's in the sale contract), your customers don’t have to change suppliers, you enjoy a better return on your investment and you can find joy in the fact that the legacy you’ve built will continue its operations—even if you’re not at the helm.
If you’re ready to start the selling process consider listing your business for sale on our website so that you can gain access to thousands of highly qualified buyers. Alternatively, if you’d like some extra help from a business broker, you can use our SellerMart service to connect you with reputable brokers.
Good luck with your sale!