There’s a lot to take care of when selling a business! It’s often an emotionally demanding time during the process, and things like the bookkeeping and accounting for the sale of business can get pushed down the priority list.
Taking care of the accounting means it’s easier for both parties – the seller and the buyer – to understand the responsibilities each party has for financial management and reporting. It also means the tax, GST and payroll liabilities are clear for both parties.
Here at On The Money Melbourne bookkeeping, we have assisted several people selling a business and we understand how tricky the accounting can be and how important it is to get the financials correct.
The Most Important Document when Selling a Business
The most important reference document is the contract of sale. It’s essential to get a clear and detailed contract drawn up when selling a business.
The more information your contract has, the less chance there is of disagreement or misunderstanding about the contract terms.
As there are many variable factors in a sale contract, it’s not always obvious at first what the contract is setting out. Before signing, make sure it’s in simple terminology and the terms of the sale are clear so that you can provide the document to your business advisors.
The sale of business contract must clearly show:
- The date of sale.
- What is being sold – an entity or a business?
- Assets and liabilities that are transferring with the sale.
- Equipment or other assets under loan arrangements.
- Whether any existing loans or debts will be transferred as part of the sale.
- What is happening with each employee, their employment status, their record of service and their entitlements?
- The amount and timing of deposit and settlement amounts, including information about amounts held in trust.
What’s the difference between selling an entity and a business?
The simplest answer is that when selling an entity, the ABN transfers to the purchaser. When selling a business, but not the ABN, the purchaser must get a new ABN.
When an entire business is sold, from the customer’s point of view, nothing changes. Business carries on as usual but the legal entity and management behind the scenes changes.
Employees and Payroll Liabilities
One area that is often managed poorly or not defined clearly in the contract is employees, entitlements and payroll liabilities.
Are the employees being terminated by the current business owner and either let go or re-engaged by the new owner? Or are employees being transferred to the new business without loss of service records, the new owner being responsible for all entitlements and payment of liabilities?
If the purchaser wants to hire some or all of the existing staff, they will need new employment agreements with those employees.
The sale contract must address each employee as there may be some that transfer to the new business and others who are terminated and possibly others who continue but with a new arrangement or employment status.
You’ll need to consider what happens to your employees before you finalise the sale contract.
Bookkeeping and Accounting GST Implications
There are several factors to consider when working out the GST implications of a sale of business.
- Is the sale a transfer of the business to a non-associated entity who is purchasing the business?
- Are the seller and buyer associated entities who have a prior connection in some way?
- Is the business being sold as a going concern and the sale includes all the necessary elements to continue the operation of the business? In this case, the business continues as usual up to the date of transfer and the new owner takes over the operations from that day. This type of sale is GST free.
- Is the vendor selling certain aspects of the business but not everything? In this case GST will apply to the sale.
Working out the GST implications of selling a business is another reason the contract is so important.
Other matters that may affect the bookkeeping are whether recurring subscriptions can be transferred or must be cancelled and started anew with the purchasing entity. If customer payments are made into incorrect bank accounts funds will need to be returned. If one entity is making or receiving payments on behalf of the other for a transition period, for example in the instance of an associated entity, the transactions must be tracked to correctly inter-entity loan balances. (Check out our article Why it’s Important to Track Inter-entity Loans for more detail on this topic).
Even if you have experts like On The Money Melbourne bookkeeping helping you to get the financials right, the better your bookkeeping and record keeping is for all aspects of the sale, the more smoothly the transition will go.
What’s for Sale?
When selling a business you may or may not choose to sell everything associated with the business. The old owner and new owner must agree on which assets are included in the sale price.
- There may be some assets retained by the old owner or all business assets may be sold.
- The registered business name may or may not be sold.
- There may be intellectual property to consider.
- There may be physical property, machinery, equipment, hardware and software to negotiate.
- Consider furniture, fittings, fixtures, décor and stock.
- Consider rights to use names associated with the business and old ABN.
- Consider loans and lease agreements for premises or equipment.
Things to Consider Before the Sale of a Business
You’ll need to make a list of all systems, software, apps and payment platforms that are active.
For example, if the old owner has a Stripe account linked to their name and ABN, the new owner should not use the same account unless they are purchasing the entity (trading under the seller’s ABN). If they’re purchasing the business but not the entity, they will need to create a new account linked to their name and new ABN.
The same applies to any app or platform associated with the old owner and ABN – you’ll need to cancel the account and the new owner needs to set up their own account. Most importantly – remove any online sales links to the old business and ABN.
We’ve seen people trying to take the ‘easy’ way and just keep using the same Stripe or PayPal account that was set up by the old owner, but this can cause major issues later when needing to update account holder details or change bank accounts. Take it from us, it’s much easier to get the new accounts set up in the name of the new owner before they start trading! And if you’re the one selling, do not allow the new owner to use your credentials or accounts unless they’re buying the legal entity. If they’re buying the business only, ensure that the legal name and ABN can be updated within the app to correspond with the new owner’s ABN before granting the new business owner login access.
Also think about domain name ownership, licenses and registrations, industry association memberships, and anything else the business needs to legally operate.
Do you have contracts with suppliers or customers that will need to be updated? For example, if the new owner plans to operate from the same premises, the old owner will need to finalise the lease contract and the new owner take out a separate lease agreement.
Remember that the old owner is responsible for all legal obligations until the transfer of ownership is complete.
Close the bank account ASAP!
An important task to organise as soon as possible after the sale is to close the bank accounts associated with customer sales. This avoids customers depositing funds into the wrong account associated with the old owner. Closing bank accounts at the time of the sale will also avoid unnecessary bookkeeping to sort out payments that need to be returned to customers.
It’s the buyer’s responsibility to set up a new bank account associated with the new ABN and to provide the new details to all customers.
Cancel the Old ABN
In fact, you’ll need to list anything that is associated with the Australian Business Number of the old entity.
When you sell a business, you have to cancel the ABN and the new business owner will need to register for their own ABN.
Before cancelling the ABN, make sure you’re up to date with activity statements, tax returns, Single Touch Payroll and any other lodgements required. You’ll need to lodge and pay all obligations associated with the old ABN.
You’ll also need to update details on the Australian Business Register.
Business and Payroll Records
You’ll need to provide all payroll records to the new owner, including timesheets and employment agreements, for any employee being transferred to the new business. The new owner will need to set up their payroll software with all service details carried over from the previous business. They will also need to prepare new agreements with the new business ABN and will need to refer to previous agreements.
You’ll need to keep all business records for seven years after the sale. Even though you have provided the records to the new owner, you must keep copies in case any issues arise in the future that relate to the period under your ownership.
Make Selling a Business Easier with the Right Professional Help
Talk to your bookkeeper and accountant before you embark on selling a business, and follow their advice! A business broker may be experienced in negotiating terms and contracts, but you still need to understand the financial implications of the contract for each party. Some accountants are experienced at selling a business and so you may not need a broker as well. Depending on the complexity of the situation, you may need a solicitor to draw up the contract.
If you’re buying or selling a business and need help with getting the financials right, we’d love to help. Getting all the financial reporting correct can be complex, especially where there are employees, loans and assets involved.
For more details on all aspects of selling a business, visit ATO Changing, selling or closing your business.