PAYG, allowances, living away from home, time in lieu, salary sacrifice, taxes, awards - payroll can be one of the most complex areas that a business has to deal with. To complicate things further, payroll regulations often differ between states and territories.
When it comes to buying businesses, potential buyers tend to focus on the following three areas of payroll expenses:
- Service leases
In most acquisitions transactions, the buyer is a large company, and payroll can add up significantly. All three of the above items also carry annual expenses for any business.
These areas can present both opportunities and liabilities for prospective new business owners. Opportunities exist to restructure systems to suit new goals and industry changes. If the current business owner is owing in any of these three areas, it can be a huge initial expense.
Employees and their entitlements are considered to be part of the business and part of a sale. The buyer will inherit these employees and will be responsible for the payroll entitlements they are owed. If a business has many long term staff, the employees are likely to be owed large leave entitlements.
A new business owner may deal with each existing employee in one of three ways:
- To terminate their employment
- To offer employment with no recognition of prior service
- To offer employment with recognition of service
If a buyer decides to terminate employees, they will become redundant. This will require a buyer to pay out all entitlements, both legally and contractually stipulated. This can be an expensive outcome, and will need to be negotiated in the business sales terms.
2. Offer employment with no recognition
In this situation, a buyer may want to keep an employee on, but begin a new contract with that employee. Again, all entitlements will need to be paid out, including redundancy pay if necessary. However, the new buyer can decide to renegotiate on some accrued entitlements, making it an appealing prospect.
3. Offer employment with recognition
This is the easiest method of payroll transition. A new business owner can keep employees on as they were before the sale, with no change to entitlements. However, there will have to be some adjustments made between seller and buyer, which may negatively affect the final sales price.
For sellers, having accurate figures for all employee entitlements is important. These values are usually hardcoded into the transaction terms and can drastically affect the outcome of a sale.
Equipment and property is essential for the operation of a business, no matter how small. Leasing equipment and property counts as an asset of a business, and should be factored into the final sales price.
- A service lease is where the owner of the property agrees to maintain and service the leased asset.
- This type of lease is especially prevalent in businesses that require machinery and specialised electronic devices.
As the service lease is entered into by the business, the buyer of a business may be required to uphold the terms of the lease. To ensure a successful sale, service leases must be treated with the same care and detail of other payroll reports. Misreporting and failure to provide records may result in a lower sales price, or an unsuccessful sale.
When buying a business, one of the first things that prospective buyers will look for is a healthy tax record. Savvy buyers will require accurate tax reports, including:
- Income tax statements from at least the last three years
- Business activity statements, taxable income statements, and other financial statements
- Up-to-date payroll tax records, like PAYG, GST, and other tax obligations
- Stamp duty records
Payroll tax is the tax businesses pay on their wages. Wages include pay, remuneration, salaries, allowances, commissions, bonuses, shares, payments to contractors, and a host of other payments and contributions.
In Victoria, businesses paying over $650,000 in wages annually, or $54,166 monthly, must must pay an additional payroll tax based on a percentage of overall wages to the State Revenue Office.
It's important that prospective buyers of your business have an accurate summation of your payroll taxes for at least the last three years. This will help new owners map out an accurate progression of the business.