Long ago in a far away life…..
When I first started out in this game of selling businesses for people, there was no capital gains tax. But there was a large tax on drawings or dividends. So in the time leading up to a sale, business owners would leave as much cash as possible in the business, and add the cash value onto the sale price of a business.
Buyers loved it because certain ratios looked really good. The seller was paid a sum of money which had no CGT taken from him.
If you’re clever those days are back again… Well almost.
- If you have to dump your business and run, you will have a problem.
- If you plan for a sale well in advance, it can work for you, and spectacularly so.
- If you draw all your profits every year, it won’t work for you.
- If your balance sheet is healthy, and you make a decent profit, it will work for you.
- If you have to fight for cashflow to make wages every month, forget it.
- If you have large contingent liabilities, then no chance.
If you don’t think it’s a biggie, then consider this: Would you prefer to pay 34% of your selling price to the National Treasury, or 13%? The difference is a lot of beer money in even the smallest deals, and the difference between a retirement house and a retirement apartment in the bigger deals.
Of course if you knew your business value, you would be able to work out the difference, and you could do some meaningful planning for your life.