Preparing Your Business for Sale: A Guide for Small Business Owners

Derek Vogt
Jan 10
4 min read

Updated: 7 hours ago

In Australia, buying a business under $5M presents a specific challenge: The "Bricks and Mortar" mindset of Australian banks. Unlike the US, where government-backed cash flow lending is common, Australian "Big 4" banks typically require residential property as security for business loans.

To bypass this hurdle, professional dealmakers in Australia use a "Micro-Private Equity" approach. They structure a Capital Stack that reduces reliance on bank finance, leverages Vendor Finance (secured via the PPSR), and utilizes specific Australian tax concessions (CGT Look-Through rules) to bridge valuation gaps.

Understanding the "Aussie" Capital Stack

Instead of asking, "How much cash do I have?", a Lead Acquirer constructs a stack of funding sources. For a <$5M acquisition, the structure typically looks like this:

Layer 1: Senior Secured Debt (The Hardest Layer)

Target: ~40% – 50% of Purchase Price.
Source: Tier 1 Banks (CommBank, NAB) or Cash-Flow Lenders (Judicial, Octet).
The Australian Reality:

- Secured: If you have home equity, this is the cheapest money (~6-7%).

- Unsecured/Cash Flow: If you have no property to secure the loan, you must rely on "Fintechs" or specialized cash-flow lenders. These rates are higher (10–16%) and terms are shorter (3–5 years), putting pressure on cash flow.

Strategy: Keep this layer smaller than usual to ensure the business can service the aggressive repayment terms of Australian unsecured lenders.

Layer 2: Vendor Finance (The Bridge)

Target: ~30% – 40% of Purchase Price.
Australian Legal Mechanism:

- General Security Agreement (GSA): The vendor takes a charge over the business assets.

- PPSR Registration: The vendor registers their interest on the Personal Property Securities Register. This protects them if you go bust, giving them the right to reclaim the business assets.

Why Sellers Accept It:

- Price vs. Terms: They get a higher "headline price" in exchange for waiting for their money.

- Interest Income: You pay them interest (typically 8–10%), which beats a term deposit.

Layer 3: Buyer Equity (The "Skin in the Game")

Target: ~10% – 20% of Purchase Price.
Structure: Shares in a specific purpose vehicle (e.g., AcquisitionCo Pty Ltd).
Co-Investors: You can raise this capital from private investors (Trusts or individuals) under a Shareholders Agreement.

Warning: Due to "Sophisticated Investor" rules (s708 of the Corporations Act), you are generally limited to raising funds from people you know closely (family/friends) unless you produce a formal disclosure document, which is too costly for small deals.

The Payment Waterfall (Cash Flow Priority)

As the Lead Acquirer, you manage the Payment Waterfall. This dictates the order in which cash leaves the Pty Ltd bank account.

Statutory Obligations: ATO (BAS/Superannuation). Note: In Australia, Director Penalty Notices (DPN) mean you are personally liable for unpaid Super/PAYG, so this comes first.
Senior Debt: Bank principal + interest.
Vendor Finance: Monthly payments to the seller.
Lead Acquirer Salary: Your market-rate wage (included in OpEx).
Dividends: Remaining profit split between you and co-investors (fully franked if tax has been paid).

Australian-Specific Creative Tactics

The "Look-Through Earn-Out" (Tax Advantage)

Since 2016, Australian tax law has favored earn-outs via "Look-through Earn-out Rights" (LTEOR).

The Problem: Previously, sellers had to pay tax on the estimated value of an earn-out upfront.
The Solution: Under LTEOR, capital gains tax is deferred until the earn-out is actually paid.
The Play: Use this to convince a seller to take a large performance-based component. "Mr. Seller, if we structure this as an earn-out, you don't pay the tax on that $200k until I actually pay you the cash."

The "Employee Entitlement" Adjustment

In Australia, businesses carry liabilities for Annual Leave and Long Service Leave (LSL).

The Play: At settlement, these liabilities are deducted from the purchase price.
Example: Purchase Price is $1M. There is $50k in accrued staff leave. You only transfer $950k to the seller, but you keep the $50k liability.
Result: You effectively "borrowed" $50k from the employees interest-free to fund the deposit.

The OpCo / PropCo Split (SMSF Strategy)

You cannot use your Self-Managed Super Fund (SMSF) to buy the business you work in (OpCo). However, your SMSF can often buy the "Business Real Property" (PropCo).

Structure:

- You (or Company): Buy the Trading Business (OpCo).

- Your SMSF: Buys the Commercial Building (PropCo).

- Lease: OpCo pays rent to your SMSF.

Benefit: This unlocks your superannuation capital to help facilitate the deal (by taking the real estate off the table), while ensuring you pay yourself rent.

The "Heads of Agreement" (HoA)

For a $1M AUD acquisition, a professional HoA sets the stage.

Purchase Price: $1,000,000 (Plus Stock at Valuation - SAV)
Settlement Tranches:
Cash at Settlement: $600,000 (Funded by Bank + Equity).
Vendor Loan Note: $300,000 (Secured by GSA/PPSR, amortized over 3 years @ 8%).
Look-Through Earn-Out: $100,000 (Payable after 12 months if Gross Profit is maintained).
Adjustments: Price to be reduced by value of assumed Employee Entitlements (Annual/LSL).
Restraints: Seller restrained from competing within [State/Territory] for 3 years.
Handover: Seller to provide 4 weeks unpaid training + 3 months paid consulting (via ABN invoice).

In conclusion, preparing your business for sale requires strategic planning and a deep understanding of the financial landscape. By utilizing these tactics, you can navigate the complexities of the Australian market and achieve a successful sale. The right preparation can lead to a smooth selling experience and the best possible price for your business.