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It’s not commonplace to think about exiting your business when you first enter the world of entrepreneurialism, but Nick Young suggests you should.
Start-ups are naturally more focused on the hopes, dreams and potential of what the business can become, fused with what’s tactically required to get it off the ground.
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“What’s less realised is that how a business is set up can have quite a significant impact on its sale value and relative complexity upon exit. In context, we recently had a situation where a broker thought he could sell his trail book in full upon leaving his company. However, throughout the transaction process, it became apparent that he didn’t own his book outright based on the structure of his company – which caused all sorts of issues. The end result was to sell his shares of the company to his business partner, which included a portion of his book,” says Nick Young, managing director, Trail Homes.
“To help prevent unexpected surprises we encourage all businesses, but particularly start-ups, to align with an accountant from the outset to ensure their company structure supports their immediate and ongoing objectives – and in particular, to make sure that when they’re ready to exit the business, they can do so simply, cleanly, and realise the full potential of their trail book,” Mr Young continues.
Justin Mastores, managing director of the Melbourne-based accounting and advisory firm, Rees Group, concurs.
“The structure established from the beginning should reflect your ultimate professional and personal goals. Conversely, a lot of start-ups go for the simplest, lowest cost structure, without any consideration of their exit plan. We therefore spend a lot of time unwinding company structures and detangling messy partnerships that could have been avoided should the business objectives and structure be determined upfront,” he says.
At a practical level, new brokers should structure their entity wisely from the outset to both be tax effective and protect their assets – whether that be a trail book, property or other.
In addition, the right structure can directly benefit eligibility for future business loans as well as general expansion.
Here’s a brief overview of the basic structures, as well as some general pros and cons:
- Sole trader: While this isn’t a typical structure for brokers, some choose to be a sole trader to start with to test the waters. It’s low cost to enter and low cost to run, though does have some tax negatives – and it’s not ideal if the business grows rapidly.
- Proprietary limited company: This is a clean corporate structure that’s commonly selected. It has an effective tax rate of 27.5 per cent, simple compliance and provides asset protection, which enables the business to run separately to personal affairs. The downside is that upon exit (and of course, depending on how it’s been set up), small business concessions and capital gains tax may not be accessible.
- Unit or discretionary trust: The basic concept of a trust is that a legal entity (The ‘Trustee’ either an individual person or a company) holds property or assets for the benefit of certain named persons, or beneficiaries. This structure has favourable tax benefits, as it enables profits to be distributed to family members, as selected. It also provides clear access to tax concessions upon sale time, which can positively affect sale value of a trail book. The downside is that the set-up and ongoing costs are higher than a straight company.
When considering the business structure, Mr Mastores suggests identifying the expected one- to three-year turnover, whether staff are forecasted (and if so, how many and when), what software/ledger system will be used to keep a running track of performance, and importantly, whether there’s enough working capital to support interim operations. Post set-up, Mr Mastores recommends meeting with an accountant quarterly to review forecasts, tax planning, cash flow assessment and general business advice.
Mr Mastores further suggests that “when selecting an accountant, consider what value can be added on top of general tax and compliance service to the business. This includes helping with the initial set-up and systems, as well as the growth plans. Ask them what they’re going to do differently and what value they’re going to provide to your business. And importantly, make sure you feel comfortable with the accountant, as to be effective, they’re going to need to be across your personal and professional goals.”
“Keep in mind that everyone’s situation is different, but the commonality is that there’s an immediate opportunity for every broker to be a more efficient operator with greater financial gain when guided with the right advice,” he concludes.
