A fairy tale… or is it?

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Once upon a time the citizens of a small kingdom far, far away created an amazing invention.  Excited they were, so much so that they proudly displayed their new invention at a trade fair on the other side of the world and waited for the money to roll in.

People came from all around the world to gaze in admiration. Some were so impressed that they used the invention as the basis of what quickly became flat screen technology. Years later almost all the televisions in the world use that technology, giving other kingdoms billions of dollars of sales each year, with not a cent ever paid to the citizens of the small kingdom.

The citizens now say that they lost billions of dollars because they received poor legal advice. From what we understand though, they didn’t actually take any legal advice in the first place. If they had, they might still have valuable intellectual property and a very valuable business to keep or sell.

The citizens of the far off kingdom weren’t fortunate enough to be Gaze Burt clients, but their story is a salutary reminder of how the best laid plans can go astray when trying to maximise the potential of a business.

We often deal with business sales and purchases, some for small amounts and some for prices running to tens of millions. We have seen some clients of other firms learn the hard way that:

  • Any important intellectual property needs to be identified and if possible protected. It’s very difficult to protect know how and not many businesses have inventions that can be patented, but many have designs, plans and other two or three dimensional material that have copyright protection.
  • It’s best not to combine two completely separate businesses in one set of accounts. That makes it much harder to show separate sets of accounts to anyone wanting to buy either business.
  • More sophisticated buyers work backwards to work out the value of a business. If for example it has a $200,000 profit any buyer expecting a 20% return will value the business at $1 million. This means that whenever you can increase your profit (often called EBITDA or similar) by $1, the value of your business will increase by $5.
  • Sometimes people run all sorts of personal expenses through their businesses. If they can keep their accounts clean and maximise their sales figures for at least three years that can make an exponential increase in the value of the business.
  • Most purchasers will check the amount of business income against the GST returns. Any anomalies will quickly be discovered.
  • Anyone owning both a business and the property where it operates, should consider whether they could sell the business and lease the property to the new business owner. The rental income might provide a much needed income stream.
  • It pays to avoid employment contracts requiring large redundancy payments. Even if a company is sold with all staff in place (which means that there are no actual redundancies), the law treats every staff member as technically redundant. Even though no one has lost their jobs, the sale might cost the vendor a fortune in redundancy pay.

Don’t be like the citizens of the small kingdom mentioned above.    Plan for success and contact Gaze Burt when you need to buy or sell your business.

mm
Les Allen
Partner

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