Business sales over the past six months or so have been light mainly through the banks lending policy to small businesses. Never the less along with some leasing activity we are selling businesses and have some good businesses for sale.
Businesses sold recently:
- Liquorland Nelson
- Early Bird Transport
- Wharfside Restaurant and Bar Mapua
- Clansman Havelock
- Wakefield Bakery
Following is an interesting question and answer on tax implications on the sale of tangible assets (plant, fixtures and fittings) for a small business.
Inflation of price attributed to tangible assets
On the Sale and purchase of a Business Agreement the Tangible assets, were stated at $150,000, more than their $40,000 true value and $100,000 more than book value. The purchase is made and within six months the business comes onto the market again with the vendor asking $150,000 for the tangible assets.
My question is there any come back from the Inland Revenue in this scenario.
Except in avoidance cases it is unlikely IRD would set aside an agreement between unrelated parties however the apportionment should be reasonable. In this instance it would appear that none of the sale price is being attributed to goodwill and all of it is being attributed to tangible assets which we presume are depreciable assets. Depreciation recovery is calculated on the basis of the greater of the consideration or the market value of the depreciable property. In this scenario the consideration is greater than the market value and consequently IRD are likely to benefit as all the depreciation will be clawed back from the vendor and then allowed again to the purchaser to IRN obtain a timing benefit. From the vendor's perspective attributing the entire purchase price to the tangible assets could have the effect of increasing depreciation clawback.
From the purchasers perspective it is likely to do the opposite and potentially increase depreciation.
Generally where depreciable property is sold together with other assets of a business for a single purchase price the naturally opposing objectives of parties transacting at arm's length will generally mean the allocation of the purchase price among the different assets sold should provide a reliable guide to the market value of the depreciable property.
It is clearly in the interests of the purchaser to achieve a satisfactory apportionment because it becomes the purchaser's cost for depreciation purposes. If the allocation is not genuine or there is no allocation and apportionment different from what is set out in the agreement for sale and purchase may be justified. Once again, the vendor needs to carefully consider the implications before agreeing to such an apportionment.
To summarise, as the numbers have been presented the tax implications are as follows:
• Book value $50,000
• ‘true value' $40,000
• Sale per agreement $150,000
• Depreciation recovered - difference between Book (depreciated) value and original cost price
• If the assets had been sold at ‘true' value there would be a $10,000 deductible loss on sale but tax treatment of remainder of the sale price depends on the nature of the intangible component.
• Acquired depreciable assets at $150,000
• Depreciates for a few months but then re-sells, possibly at same price
• If that price is achieved then the impact to purchaser is tax neutral
These comments are based on only partial facts, and in fact both parties need to get expert tax advice
Putting a Value on Intangible
If stock and plant were all that mattered then accessing the market price of a business for selling would be a breeze. Far from it. Lots of intangible assets are involved in the make up of any business and ascertaining the value of these is a mile trickier.
Traditionally these assets such as copyrights, intellectual property, business systems, reputation, customer loyalty, leasing arrangements, future maintainable income and profits are generally referred to as the intangible assets of the business and are considered to be where the real worth of a business lies.
The difficulty though is working out how much these intangibles collectively are worth. More often than not the vendors view will vary considerably from that of the potential purchaser. You need to get an objective opinion from an experienced person in business appraisals well before you commence marketing your business.
Valuing those Hours of Toil
Many small business owners tend to assume the thousands of hours spent working and building up their business must equate to a certain value in the market place, but unfortunately this value is unrealistic in many cases.
The potential purchaser is not going to pay a price merely to recompense the previous owner for his and her sweat and toil. They will want to know the future maintainable earnings of the business, based on, for example length of lease (if applicable), position, customer base, systems, staff etc.
Those long hours will be rewarded, however if the owner in conjunction with an experienced business broker have been effective in developing an excellent foundation based on those critical yet intangible assets.
Attending to Business
The appraisal may well highlight areas where more attention is needed to either improve the overall business performance, or simply address any oversight. In both cases the intangible factor and therefore the value of the business can be enhanced.
The Real Estate Agents Act 2008
There has been some significant rule changes to the old Real Estate 1976 Act some of the changes not before time and some in my view a little radical, but all in the interests of the consumer.
One of and a very significant change for business owners and their chosen agent is in Rule 9 of the Professional Conduct and Client Care.
- 9.5 Appraisals and Pricing
- 9.5 An appraisal of land or a business must be provided in writing to a client by a licensee; must realistically reflect current market condition; and must be supported by comparable information on sales of similar land in similar locations or businesses.
- 9.6 An advertised price must clearly reflect the pricing expectations agreed with the client (Vendor).
- 9.7 A licensee must not mislead customers as to the price expectations of the client (Vendor).
This section, read in conjunction with the REINZ Code of Ethics.
- 13.10 Members shall not accept instructions to carry out an appraisal unless they are competent to carry out such appraisals.
Vendors are able to set a price or price range that they want to sell their business for, but when listing, their chosen agent bylaw, has to provide a written appraisal for the business.
With well over 20 years in Commercial and Industrial Sales, specialising in the Sale of Businesses attending over those years, valuation seminars, conferences, Business Valuation Courses provided by the NZ Society of Chartered Accountants, along with actively appraising businesses as part of Business Broking and access to business sales statistics throughout New Zealand, I am well qualified to meet the new 2008 Act and provide appraisals to Vendors as their chosen agent.
A bonus to this is the experience to those business owners that are selling as a ‘freehold going concern' we can call on Tony Gowans with over 30 years in Valuation of Commercial and Industrial properties in the Nelson / Tasman region for a Real Estate Appraisal of the freehold portion.
We are fully competent to meet the New Act.
Accredited Business Broker