[EP 310] Restructuring Before a Sale: What Most Businesses Get Wrong

Ladies and gentlemen, good evening. Are you ready? Okay, here we go. You're listening to The Deal Room Podcast.

Join us as we bring you the inside scoop on business sales and acquisitions. Get across trends in the area and hear the industry's best recount their real life tips, traps, and experiences. Now, here's your host, Joanna Oki. Hi, it's Joanna Oakey here and welcome back to the Deal Room Podcast, a podcast proudly brought to you about commercial legal practice, Aspect Legal.

Now, in this episode, part one of a two-part series, we're sharing insights from a webinar I joined with Brett from Business Valuations Online, where we focus on one of the most overlooked areas in business sales, restructuring and exit readiness. Now, Brett is a business valuation and forensic accounting expert with more than 30 years of experience, and he helps business owners and advisors turn complex financial data into clear, practical insights. Not only that, but he's also a regular presenter to accountants and lawyers and has seen firsthand what happens when businesses aren't set up properly before a transaction.

Now, in this episode today, we are talking about why business structured decisions made early can have major consequences later, the role of proactive advice and why waiting until a sale is underway is often too late, and how advisors can help clients become exit ready well before a transaction is on the table. So let's jump in to part one of our two part series in our discussion with Brett Goodyear from Business Valuations Online. Okay, so two things we're talking about today, now that we're live, is restructuring and employee buyouts.

And then we'll have a bit of a Q&A. Actually, I've got to say, Brett, your idea of talking about war stories as well may be way more interesting than some of the guff I'm talking about. So please throw in along the way. We all know everyone loves to hear war stories and things that go well as well.

So we've divided this into two halves. I'm talking about restructure first and then the second bit I'm talking about employee buy-ins, but starting with restructure. So why am I talking about this with you? The issue is when we deal with sellers at exit.

The issue that we come against or up against time and time again is that the structure of their business is creating some sort of issues with the sale process. So it might be an issue with the sale process in terms of complexity structure, assets a little bit messy, buyer comes in and the process itself is a bit confusing or scares off buyers. So that's one of the first areas. The second area, which is perhaps even bigger than the first, is the tax issues for sellers.

Not issues, but the fact that so many sellers we see are not optimized for exit. Now, we're not tax experts. We leave that to you guys as the accountants or your specialist, parts of your accounting division or the third-party specialist that you bring in. But we see the issues at exit when suddenly accountants become aware of the fact that their clients are selling and they had no idea that they were about to sell and realise that the structure of their sale is putting them in a situation that is not highly advantageous from a tax perspective at exit.

I'll talk to you about… Yeah, sorry. An example on that one. Please, please give us an example. I was nearly six or seven minutes without hearing my voice.

It was very - I missed it too. I missed it too. Absolutely. So a great example of that was that I had a business reasonably recently.

It was an NDIS business and, you know, they need to be registered and it's not necessarily - the registration is not necessarily transferable. And so the structure, ordinarily you would see in those kind of businesses would be a corporate structure so that you're just selling the shares and the entity that holds the business, that holds the registrations, for instance. And it was held in a discretionary trust, which meant that essentially that became an extraordinarily complex process to be able to try to get those registrations out of that entity.

And so you can't sell the discretionary trust across, of course. And so there was a lot of implications because they just didn't get the right structuring advice from the beginning. So example number one. Such a great example because actually we deal with a lot of RTOs, a lot of NDIS businesses.

So both of those types of businesses are examples of where there can be a real issue in the transfer of the assets, so the value of the business transferring out at exit if they're not structured correctly for exit. Actually, we'll talk about the employee buy-in side as well is another classic example of where you're having a buyer buy part of the entity because when you have a buyer who's coming in and not buying 100%, it is very difficult for them to do if the structure is a discretionary trust that they're running the trading entity out of.

And so in these ways, you know, being aware of the lack of flexibility in the future plans of the business owner is actually critical, I think, in considering structure for a business, for what it is now and what it should be moved to. But a few other, so I think they're great examples. Brett, thank you for pointing to those. And a couple of others that I'll point to here.

So these are, we actually have so many examples, it's sort of hard to pick exactly which ones to tell you about. But I'll tell you about this one. This was fairly recently. So our client was tapped, this is Peter, Peter, our client, was tapped on the shoulder by a supplier who wanted to buy their business.

So this is an example of a seller who hadn't realised they were about to be on the market. And this can happen in so many instances of sale where one of your clients may not think they're about to sell their business, but they're tapped on the shoulder. So the lesson from this is you need to be ready for even if your clients aren't saying that they are planning to exit in the next short period of time. Anyway, what happened in Peter's business was that their business had been restructured by their accountant years ago, but it had been really messy.

So what had happened was they didn't have a clear - I mean, I think they did have a checklist that they were working through, but they didn't actually do all the things on the checklist. So they had assets in all different locations. They had customer contracts. They had large customer contracts that were sitting in multiple entities.

And when their buyer was a corporate and, you know, in many instances, a corporate is a very attractive purchaser for a business because they quite often, particularly if they're a strategic buyer, will pay a higher price than if the business was just on the market. But here in this instance, the issue was the buyer was corporate. They knew what they were doing. They had top-tier lawyers acting for them, and that meant detail.

They started due diligence. They started looking into the business. They saw the mess with the restructure that hadn't been properly implemented all those years ago. And the second overlay was that the structure was not optimised for exit.

And so the tax outcomes were looking rather grim. So, the accountant said, no worries, we'll do a quick restructure now before sale, but the corporate was already in there looking with their top tier lawyers, as I said before, very detailed. And so, what happened was we did the restructure at that time, but we had to do the restructuring the way that the buyer wanted, which meant it was a much more laborious and difficult process, and particularly because it had been quite messy in the background.

So the result was, number one, there was risk from a tax perspective because of the timing. And the accountant essentially provided advice in that situation that really this wasn't a risk. But he then was, by the provision of that advice, I think was putting himself in a position of risk. Should there be a tax issue that comes up later in the piece?

So that's the first thing. I think not only was the client at risk, but now the accountant is at risk because of the late stage of this restructure and some of the issues that occurred during it. It was messy. It took time.

And it cost a lot more and was more complex than it would have been if we had been able to get in before the buyer had been introduced. So I think things like this can be so easily warded off if you just have a bit of advanced planning One more story story of Ted It's a slightly different story here, but it also relates to a failure to restructuring time. So with Ted, he was planning for his sale and he'd actually mentioned that to his accountants just in passing, years in advance.

So here's a different situation to Peter. Peter got tapped on the shoulder. It was a bit of a last-minute thing. Ted knew in advance, but he hadn't sat down when he mentioned it to his accountant.

His accountant didn't react with, okay, let's sit down and forward plan. And so what happened was he went to a - so because he mentioned it to his accountant and his accountant hadn't raised the issue of structure, he then went to a business broker, put the business on the market, found a buyer, arrived at a commercial deal. And at that point, we were brought in and we said, okay, you've got to bring your accountants in. And when the accountants were brought in, they at that point clicked on to the fact that actually the business should have been restructured well in advance.

Because what had happened was that Ted had bought out some of his business partners years in advance. We had a few interposed entities and that essentially was creating a tax issue for TED in the way the sale happened. So I think the answer to both of these problems, these issues that had come to us, is the same as so many matters we see. They're just sort of like they're actual examples, but we see these over and over again.

The thing is, if you get ahead in a restructure, it can be really pretty easy from relative perspective as long as you've got the process right. The closer you leave it to sale, the harder it can be because you'll have a buyer's eyes on the process as well. Okay, so poll. Can we throw a poll in here?

So my question is, do you have a process that helps your clients review and reconsider their structure in a regular perspective? So I don't know if we - is anyone seeing this poll? So the poll is up. We're getting some answers.

And fill it out. Once you tell me to, I'll press end poll and we'll see the results. All right. Well, let's see how that's going.

And someone's asked the example of Peter doesn't tell us anything except it wasn't good. I'm sorry. I'm sorry that I haven't given you some insight. What I was trying to do is give you a flavour of the sort of problems that come to us.

So the flavour of the problems really is just that restructures either A, haven't happened when they should have happened in the past or B, they happen too close to exit or C, they haven't been executed in a way that all of the assets, like the actual structure has transition and being completed in the way that it's meant to. So I think like that's the, and it's that issue that repeats again and again. And Umesh, if you have like some particular questions about what you're thinking, what you would more you'd like to understand about the example, I'm very happy to give you more, you know, more detail, but it really, it's just about that.

It's about the fact that timing's been missed or, and that creates tax issues or that it's done in a very messy way or that we have this issue when we try and get the value out of the business because the way we're trying to, where we left from a structured perspective at exit doesn't allow us to get the value out cleanly. Okay, so why don't we end the poll? I shall end the poll? Yeah, why not?

Tell us the results. Okay, so if you go to polls over on your right-hand side, it will tell you, but 50% of people say we'd like to, but in reality, we only do it when the client asks. 42% say, yes, we ask the client as a part of an annual review. And 7% say, yes, we ask the client all the time.

Yeah. Yeah. And part of that annual review, I just want to note something about that annual review process. Because one of the things that I get sellers say to us regularly is when I say, have you spoken to your accountant in detail?

Have you had clear tax advice so you understand what tax looks like at sale here? When I asked the first question, have you spoken to your accountant about this? The answer is they say yes, almost always. Then the second part of the question, do you clearly understand what structure is best for you at sale now?

And we're talking business sale, share sale, whatever the other elements might be. And what, from a tax perspective, on what tax looks like at the end. And they will almost always say no. And so I just, like, I invite you to have a deeper conversation with your clients.

And if they sound like they're about to go on the market, you have the opportunity here for a tax advice component if that's a service that you offer. You have, as they're leading up to talking to you about what, where they are in the business, what the business looks like at the moment. I think part of that annual review process should be a deep consideration of whether or not this is, are they in a structure that could create an issue for them at Exum? What I mean by that is, are they an NDIS business?

Are they an RTO where they're not set up, for example, in a company where we can do a share sale? Might they be in a situation where they are looking, where they could possibly exit, where they might want to do a share sale, but for whatever reason, the entity at the moment isn't appropriate to deal with a share sale. They're the sort of things that, you know, I think are really important when we're thinking about whether a restructure should occur. And some of that might be accounting, some of that might have a legal overlay.

And that's where we like to say we can absolutely help. If you've got a question, you're not sure about things, we're happy to be a soundboard and we're happy to jump into calls with you and the client to work through things or with you in the background. I've got a perfect example of that, Jo. So yesterday I was in meetings with regard to a merger.

So two businesses, both in sort of, let's call it allied health. One was sort of a $10 million business. This is in value. And the other one, say, three and a half.

and both of those businesses were very different but each of them had different panels and tenders and things that they'd won so they had these long-term contracts with large insurers with government entities and whatnot they wanted to now have new co new company set up for both of those entities to come together but their difficulty arises from the fact that we we don't know whether those contracts are transferable or what kind of terms within those contracts might mean that it's problematic to simply try to combine the two businesses under a new entity.

And so that structuring of that new entity was a critical consideration. And they had neither of them had spoken to their accountants or really a lawyer about the appropriate structure that would fit their particular new business because they hadn't even had a detailed review of the contracts that they were going to try to bring together under the new co. And so, it's the perfect example of looking ahead because I guess they need to make sure that the new structure was going to fit their needs at transaction as well.

So, not necessarily just what does the old company look like and what's the tax benefits and what are the, I guess, the issues he might find in a transaction where the owner is exiting or whatever they might be. Sometimes it's about how can we get the contracts or the registrations or whatever it might be to transfer smoothly into a new entity, whether that be a merger, an acquisition or otherwise so yeah it's you know it's it's quite um often the case that you don't know what you don't know the right questions are being asked and it's often it's it's a better idea to ask the questions well in advance before a transaction is in the offing just to ensure that that that trading business that entity that may day may one day want to exit and they will exit at some point but that being exit ready at all times is just something that most people don't consider until often it's too late.

I totally agree and I just feel like you know I mean I guess it's overused this concept the our clients accountants sit as their trusted advisor but it's absolutely true though you know and if that's you know you're trying to prove value to your client to keep them sticky to you Things like running through with them the way what they thinking about in the future whether they could be if someone tapped them on the shoulder might that be something that they could react to helping them make sure the structure is right and working together with a lawyer if you need to or whatever That where you can add real value like real value that clients really appreciate over and above the things that you may already be doing.

So I just think it's such an opportunity. And just to your point, Brett, Like we talked about, you know, great example you brought up there because whilst we talked about RTOs and NDISs, I guess I didn't call out the sorts of other businesses that really have to be share sales. And when you have a business, when you have a sale, essentially buyer wants the value out of the business. If you've got contracts with large customers, with government customers, with customers that are corporate, with suppliers that are key suppliers that may be only supplying this business and not others, you have a stack of contracts that could be very difficult to transfer on a business sale.

And in those sorts of instances, share sale becomes critical in keeping the value in the business. So it's those sorts of things that are the overlay. As you say, it's not just tax, but there is tax. There's the tax opportunity, but there's also all of these other elements about making sure you understand if they were to sell tomorrow, are they really in an entity, in a structure that makes that be able to happen?

in a way that doesn't devalue them if they're on the market. Absolutely. I also, as an ex-director in insolvency businesses, I saw regularly that having the correct structure in place early on was also an asset protection mechanism for the directors of trading enterprises as well. when, you know, everything's fantastic when everything's going well.

But at the moment that the, you know, shit hits the proverbial fan, the structure that's in place can either massively help or hinder the directors of a company as well. Yeah. Yeah, I totally agree. Like I literally was having this conversation with a client yesterday afternoon and, you know, it was just one of those situations where, you know, you realise how important restructuring for them is to protect them into the future.

So that absolutely should be part of that annual review process. Okay, so we've talked about why, why restructure, when restructure comes up and why. Very importantly, it's important to do it in advance, not in a reactive way once we know a client has a buy-up. So let's look at the mechanics of it.

So very quickly, just high level, and you probably all know this, I'm not trying to teach you how to suck eggs, but just high level. Number one, target structure. We need to understand what the optimal structure is for the business if they were to exit at any point and assume they may potentially exit tomorrow if they may react to a tap on the shoulder. So, review the structure, work out what the optimal structure might be.

The consideration of that might be just you as their accountant, but it might also involve bringing in, you know, other advisors like a lawyer or a tax advisor or whatever, if you think appropriate. Depends on the size of the business and how complex it is. So, we work out what the target structure is. We say, okay, well, the current structure isn't a target structure and so is it worth making the move?

If we deem it's worth making the move, then the next thing is to make sure we've got clear valuation and understanding of the tax and any other duty implications. Of course, valuation is where Brett comes in. I don't know if you had anything to throw in here about the valuation side, anything that you wanted to say, Brett? Oh, no, I know someone who's really good at it, so I'm just letting you know.

Great. Excellent. Wonderful. Then the next one is obviously the documentation side.

And I'll talk to you on the next slide about what that means, but it's just about documenting it properly. And so it doesn't have to be complex, but it does have to be, it does have to cover all the bases. and then the fourth element is implementation should seem obvious isn't that a fantastic cog turning on the screen but it's really about moving all the client contracts and some moving the contracts so client contracts supply contracts those other sorts of contracts they might be it might be simple to do it might be just starting up in a new entity and having clients sign on to new terms or it might have to be formal novations so this depends on the business itself and the complexity of the contracts in the business.

We need to clear PPSRs. We need to move employees. We need to move supplier accounts. We need to communicate with customers.

We need to move the lease. These are all the sorts of things that have to be done in implementation. And it can be a really long list. Now, if we simply are going to say to clients, okay, we restructure you.

It's pretty simple, you just need to make some, just move your contracts across and you're good. I promise you the outcome will be the restructure will simply just not be implemented in a way that cleans up all of the assets properly. So, there needs to be far more structured approach to make sure it's done right. Okay, so really high level overview, the high level overview of this is the documents.

So, here's some examples of the documents. We don't use all of these, but these are the type of documents that we decide where they need to be used. So, if we are, if we're transferring shares in the structure, obviously, we need a share sale or share restructure agreement. Or if it's an asset sale, we're moving just the assets themselves, it will be an asset or business sale agreement or a restructure agreement dealing with assets.

We might need an assignment of the lease. We might need a novation in a formal sense of key contracts. We might need an assignment rather than a novation. And the difference, just very quickly, between those two is that if the contract needs to be novated, it needs the customer to sign as well.

We need a tripartite agreement, the old co, new co and customer. and so there's only obviously we don't want to use an ovation unless we absolutely have to so that's the sort of thing where we have to actually work out if that sort of formality is required um there might be an ip transfer agreement we might have to have loan or debt assignments um that are documented and we might need a new or amended shareholders agreement we might need a trust deed or a variation company constitution resolution and minutes ppsr registrations in the new entity.

Looks overwhelming. I understand. Don't worry. We will send you a list of all of this.

But the, so just scan this or we'll put a link in and we'll send you all of this with all of the detail behind it so that you have an overview. But the thing to remember is there will be almost no restructure that requires all of those elements that I just talked about. And some restructures are very simple, some are more complex, but it just gives you a bit of an idea of the kinds of documents that may be needed in order to affect the restructure properly and to make sure the assets properly have been moved to the new entity.

And this can be really important at exit if at exit a buyer is doing deep review into chain of title of ownership of the assets in the business. Okay, so what do you need to do to make sure it happens? So you need to ensure there is a clear restructuring plan. Once again, this doesn't have to be you.

This might sit on the legal side, but this has to be in place. So the outcome and where we're getting to and then where we're moving from so that it's clear what needs to happen as part of the restructure. we talked about valuation and tax position confirmed legal overview so this step is really important because we need it really before you restructure or have the business restructured you should ensure that there has been a legal review of understanding how the contracts are set up in the business and what will need to happen to get those into the new entity the next step is getting it all drafted and executed, a coordinated sign-off between the lawyers and the accountants together.

Here, the ideal is that lawyers and accountants aren't working in silos. We working together as a partnership and that the way I like to see it but it one of those things that I really find often when I look at restructures that hadn been completed properly the issue has been that there hasn been a meshing a partnership arrangement between the accountant and lawyer both working on it together with the client, you know. Someone has worked in a silo and not been able to make sure everything's been ticked off along the way.

And then we've got implementation. Okay, so what can go wrong? I'd love to see, I talk to you, of course, about things that can go wrong in looking at the perspective of restructures. But can everyone throw up here, what have you seen go wrong?

What are issues that you've seen in restructures that have been tricky to deal with, if anyone wants to throw anything in here? And David's asked about indemnities and warranties for continuing and incoming stakeholders. So one thing I'll say about that. So here we're talking about an internal restructure.

And we have less focus on warranties and indemnities and internal restructure unless we're restructuring at the point of exit. and we've got a buyer looking over our shoulder at that point. And that's when the warranties and indemnities can now really balloon and then that creates risk, ongoing risk for the seller. So warranties and indemnities become particularly relevant when we're dealing with a third party.

But when we have a third party who's overseeing our restructure, that's when the restructure, when warranties and indemnities become particularly important for the restructure. Does that make sense? Okay, so Michael, issues that you've seen in the implementation plan based on asset value at settlement. So you're saying, Michael, that can be a tricky thing.

And, you know, I mean, maybe you might even want to think about running a whole webinar on valuations in this area to talk about some of those sorts of issues. I think, look, you as an audience, not very chatty at the moment, but please throw up any issues, I guess, I guess if you've had any along the way with restructures and maybe we'll talk about them at the end. But really, just high level, how do you make sure the process is smooth? start early at least one to two years before exit.

You plus the lawyer need to be working together, not in silos. Make it easy for your clients. Don't just say, okay, we're doing the asset forms to change something around, things around, but without giving them the guidance that's needed. Now, that guidance doesn't need to come from you.

We have lots of checklists and templates or, you know, if you have other lawyers, they probably have a checklist and templates too. But the point is your clients need to be educated as to how, what they need to be doing and you need to be clear on what you're doing and the lawyers need to be clear on how the process is being driven to ensure that it's actually done and it's not left messy at the end of the day with assets everywhere, like the examples that I told you about. So, where's the opportunity?

Your opportunity is this. As I said earlier, this is an area where you can add value that makes a massive difference potentially to your clients at exit. The number one complaint that we hear talked about in relation to accountants is that, you know, when we get complaints, it's about that their accountants aren't adding value, that their accountants aren't proactive. This is the sort of way in which you can really show that you're adding value when you're having these future-paced conversations, looking at structure and assessing or helping them to assess the, you know, whether it's appropriate for them.

It's an opportunity for additional revenue streams because there's accounting work, of course, that needs to happen in a restructure. But ultimately, after all of that, rather than, you know, it's not just about you adding value and being proactive rather than reactive. It's not just about the revenue stream for you, but it's just ultimately better for your clients. And I just, because I deal with so many sellers at exit and see this repeat again and again and again, I just, you know, I sort of have this plea, you're the people who see your clients every, you know, every year or more regularly, you have this opportunity to have these discussions with them, please help them identify these issues in advance and get onto them, because it really can make a difference.

So, very quickly, if you're interested in restructured package, we've tried make it super easy. Our package starts from 1900 plus GST and it's just a really structured approach too. We meet with the clients, we do all the planning, checklists and agreements, we do all the planning, the checklist for you and we also run a legal health check for the client as well to make sure they're well prepped to be exit ready at any time that they might be tapped on the shoulder. Okay.

That proactive exit readiness part is something I've always been harping on about myself, Joanna, so I'm going to beat that drum too. Some of the people that are in attendance today are also brokers, and I know that business brokers will generally not provide any advice to either the seller or the purchaser with regard to structures. But I know that most of them that are here today that I know will send them back to their accountant to get advice. But being proactive is the big key here is essentially creating a business that's exit ready at any point is essentially what you're trying to do.

And communicating clearly with your clients what you're trying to do and why you need to do it and The tax implications, if you get it wrong, is critical. And coming from that position of, I guess, education now, we've got the information in front of them. Talk to their clients to say, look, it's all fine and dandy right now. It's what happens if this happens?

What happens if that happens? It's about trying to give them an understanding of the risks, the implications to personal wealth, to asset protection, whatever it might be, and say, look, okay, yes, it's going to cost a little bit of money to restructure, to get you into the optimum structure for your business and for your personal wealth. But it's absolutely critical that you are prepared well before anything happens. Because for the accountants that are here, we all know that there's CGT implications, there's some concessions that might be available.

There's various different things that can be applied, but they have to be done before the business is turning over more than $2 million or is worth more than $6 million or whatever it might be. only you know what the business is doing. You're the trusted advisor. You have to let them know when those windows might be closing to them so that you can act swiftly to give them the best advice at the best time to preserve wealth.

So that's my little bit. Now I'll step back out. I think that's such a good point. I didn't want to talk about that as they're approaching the six million side.

But I just think that is just, you know, things like that, that's, you know, that's your expertise, you know, as accountants. I'm not going to wade into that space. But it's just such an opportunity for you, I think, to show, to provide that really, you know, that value, that really deep value to your clients. You know, it really is.

Well, that's it for this episode of The Deal Room Podcast. If you'd like more information about this topic, then head over to our website at thedealroompodcast.com or our legal firm, aspectlegal.com.

au. Or if you'd like to subscribe to get an update each time we launch a new episode, or if you would like to book a call in directly with our legal eagles at Aspect Legal to discuss your own transactional legal needs, then check out the show notes for this show on your podcast player for a direct link. Well, that's it. Thanks again for listening in.

You've been listening to Joanna Oki and The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice, Aspect Legal. See you next time. episodes in the series, check out the show notes or head over to our website at thedealroompodcast.com.

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