Selling Management Rights: Plan to maximise your gain and minimise pain

By Lel Parnis, Holmans

Selling management rights can be a challenging prospect, but careful planning and engaging the right industry professionals to guide you through the process is key to a successful sale transaction.

Ideally, planning for sale should start the day you sett le on your purchase. Reviewing issues encountered during your purchase process and taking steps to resolve them will make your own sale process easier and may increase the value of your business.

Review your letting appointments

Ensuring your agreements are all up to date, completed, signed, and include the correct licensee details is a relatively simple step often overlooked before listing management rights for sale. All management charges should be authorised in writing, and ideally, a current, signed, or initialled schedule of fees and charges should be filed for every unit in the lett ing pool to ensure no issues arise during the financial verification on sale.

Key issues, easily avoided, include:

• Agreements not signed and dated by both parties.

• Incorrect licensee and signatories.

• Incorrect format of agreements (Form 6 vs. PAMDA 20a, current version, etc.),

• Missing charges (cancellation fees, new charges, increased rates) from addenda/ fee schedules.

• Current schedule of charges not included with owner agreements.

Keeping your lett ing appointments, including addenda and schedules of fees and charges, organised — ideally in soft copy along with other owner correspondence — reduces the risk of issues arising during the financial and legal due diligence process on sale.

Net profit for sale

The sale price of your management rights will be based upon a multiple of the adjusted net profi t for a recent 12-month period — the more recent, the better. The better your bookkeeping records, the smoother your financial verification process will be.

It’s not rocket science, but the preparation of a profi t and loss statement for sale purposes is not entirely intuitive and is subject to adjustments specific to the management rights industry. Against the best advice from industry professionals, some management rights owners continue to prepare their own profi t and loss statements when they go to sell, particularly in long-term lett ing.

While this approach may save in professional fees, it is likely to increase the likelihood of a sale contract falling over or a dramatically reduced sale price due to common errors when the buyer’s accountant reviews the figures during their due diligence process.

Common, simple errors in poorly prepared sale figures include:

• Not accounting for revenue on an accrual basis.

• Failing to ensure 12 months of trading is reported.

• Making inappropriate adjustments not aligned with industry practice.

In particular, any adjustments for labour should be carefully considered. We often hear vendors pushing to exclude labour costs on the basis that a “two-person team could do it all themselves” because there were no wages in the figures when they bought. While this may be true and may have been an accepted adjustment historically, it is increasingly important that any adjustments are reasonable in the current market and can stand up to scrutiny by industry professionals.

Minimising tax on capital gains

The less tax payable on the capital gain you make selling, the more cash is available for your next venture — be it a new business or funding your retirement.

Ensuring you have the most appropriate business structure from the outset will maximise your opportunity to access the small business concessions when you sell. Even if the business structure is not the most appropriate from the outset, you may still be able to minimise any capital gains tax (CGT) exposure with appropriate planning in the year of sale.

The gross capital gain — being the sale price less purchase and sale costs — may be reduced by the 50 percent general CGT discount if the asset is owned for at least 12 months, depending on your structure. But the greatest opportunity for minimising tax on sale is by accessing the small business CGT concessions.

The small business CGT concessions include:

• The active asset 50 percent reduction.

• An active asset rollover.

• A retirement exemption.

• A 15-year exemption.

The basic eligibility criteria for access to the small business concessions require taxpayers to either have aggregate turnover of less than $2 million or net assets under $6 million at the time of the CGT event.

When considering whether to operate your management rights business through a company rather than a family trust, you should be aware of the potential implications from a tax perspective upon sale. In a company structure, you will not be able to access the 50 percent general discount, and the application of the active asset concession is less effective. That is not to say a company structure is never the right vehicle for a management rights investment.

Where your management rights business is operated through a discretionary trust, it is important to plan ahead when anticipating a capital gain to ensure any CGT discounts or concessions are available.

If appropriate distributions from the trust are not made in the year the capital gain is realised, it may not be possible to apply various concessions otherwise applicable.

Finally, if applying the rollover concession and payments aren’t made within the correct timeframe or the correct approved forms are not completed, the Tax Office may not allow the concession, which could result in an unforeseen tax bill long after the sale is finalised.

If managed correctly, technically a two-person team could sell their management rights business, make a gross capital gain of $4 million on the sale of goodwill, and pay no tax at all. Tax saved on the sale of your small business is easy money — all that’s required is to invest in good advice from the beginning.

The moral of the story

Choose your advisors carefully. Saving a few dollars today in professional fees may be lost many times over in the future when you come to prepare your business for sale and pay tax on your capital gain.

The information, opinions or conclusions provided above are generic in nature and do not express individual advice or recommendations. You should always consult a suitably qualified professional before taking any course of action outlined above. Holmans welcome any queries you may have in relation to the above matters.