By Blake Davis, M&A Advisor, DMA (Divest Merge Acquire)
Buried in the FY27 Budget fact sheets is a worked example that every business owner contemplating a sale should pay attention to. It involves how capital gains are split between the old and new tax regimes, and the method Treasury has signaled could shift hundreds of thousands of dollars, sometimes more, into a higher-tax bucket.

Most of the commentary around the Budget has focused on the headline changes. From 1 July 2027, capital gains for individuals, partnerships and trusts will move from the current 50% CGT discount to a new framework: indexation of the cost base plus a 30% minimum tax on real gains. That shift alone is significant. But the detail that matters most for mid-market business sellers is not the rate change itself. It is how gains that straddle the 1 July 2027 boundary will be apportioned between the old and new regimes.

The Worked Example That Tells the Story
Treasury’s fact sheet includes a specific scenario. An asset purchased for $800,000 is sold ten years later for $1.6 million, with the midpoint of ownership falling on 1 July 2027. The total gain is $800,000.

If Treasury used a simple straight-line apportionment, the gain would be split evenly: $400,000 to the pre-policy period (taxed under the old 50% discount) and $400,000 to the post-policy period (taxed under the new, less favourable regime).

That is not what Treasury did. Instead, the example values the asset at $1.13 million on 1 July 2027, derived by compounding the original cost base at the asset’s overall annual growth rate (CAGR). The effect is that roughly $330,000 of the gain is allocated to the old regime and $470,000 to the new one. Close to 60% of the total gain ends up in the higher-tax bucket.

For an asset that has been compounding well, which is exactly the profile of a successful business, the CAGR method systematically allocates a larger share of the gain to the post-policy period. This is not a rounding difference. It is a structural feature of compound growth, and it works against the seller.

Scale This to a Mid-Market Business Sale
The Treasury example uses a relatively modest asset. Scale the same maths to a business with an enterprise value of $10 million or $20 million and the apportionment difference between straight-line and CAGR runs into the millions. The gain allocated to the new regime, and therefore subject to the 30% minimum tax on real gains rather than the 50% discount, becomes materially larger.

For a business owner who has built value steadily over 15 or 20 years, much of that compounding growth will be attributed to the post-2027 period under this method. That is a meaningful hit to after-tax sale proceeds.

What We Do Not Yet Know
The precise ATO formula has not been published. Treasury’s worked example is the strongest signal available, but it is still a fact sheet illustration, not legislated methodology. There are important questions that remain open. The ATO has indicated that a valuation can be obtained to crystallise the cost base at the start of the new regime. However, the specific requirements of the valuation are not yet detailed. In relation to the ATO formula – wow will the formula treat businesses where growth has been uneven or back-ended? What happens where the gain relates to goodwill that has been built up over decades?

It will also be worth watching whether this concept survives through to the final legislation in its current form.

The Practical Implication for Business Owners
If CAGR-based apportionment is confirmed, business owners contemplating a sale beyond mid-2027 face a clear decision: obtain a contemporaneous valuation at or around 30 June 2027, or accept whatever the formula produces.

A formal valuation at the transition date would provide an independently supportable figure for the pre-policy gain, potentially delivering a more favourable split than a backward-looking compound growth calculation. The cost of obtaining that valuation would be modest relative to the tax difference at stake.

For owners who are already in a sale process, the timing implications are obvious. A transaction that completes before 1 July 2027 avoids the new regime entirely. For those on a longer timeline, the apportionment question becomes a planning consideration that should be addressed in the near term and not left until a transaction takes place.

Where This Fits in Sale Planning
At DMA, we work closely with our clients’ tax advisors to ensure that transaction structuring accounts for the tax environment at the time of sale. The FY27 Budget changes add a new dimension to that planning. For business owners who have not yet engaged their accountant or tax advisor on this specific issue, it is worth doing so promptly. The interaction between deal structure (asset sale vs share sale, earnout timing, deferred consideration) and the new CGT regime will require careful analysis specific to each owner’s circumstances.

This is not a reason to panic, but it is a reason to plan. The businesses that navigate regulatory change well are those that see it early and build it into their strategy, not those that discover it during a transaction.

This article is provided for general information purposes only and does not constitute legal, financial, or tax advice. Business owners should seek professional advice in relation to their specific circumstances.

Link to the Treasury worked example: budget.gov.au/content/factsheets/download/tax-explainers-negative-gearing-capital-gains-tax.pdf 

Blake Davis is an M&A Advisor at DMA (Divest Merge Acquire),. For a confidential discussion about your business or transaction, contact DMA at blake.davis@divestma.com

Most conversations about selling a business focus on the number. The multiple, the valuation, the price. What receives far less attention is how and when that number is actually paid.

Transaction structure is not a technicality. It is the mechanism by which value is transferred, risk is allocated, and the seller’s financial outcome is ultimately determined.

Every Deal Has a Gap
Sometimes it is obvious. The seller believes the business is worth $24 million; the buyer’s initial position is $18 million. Sometimes it is subtler: the headline price looks close enough, but the two parties are carrying very different assumptions about risk, about what happens after completion, and which party should bear the consequences if the business underperforms.

Price negotiation alone rarely closes that gap. Transaction structure does.

Transaction structure is the set of mechanisms that determine not just what is paid, but when, how, and under what conditions. Used well, it gives a buyer the comfort they need to stretch on price and it gives a seller a genuine path to full value.

Why the Gap Exists in the First Place
Buyers and sellers arrive at the negotiating table with fundamentally different incentives.

A seller knows their business intimately. They have lived through the cycles, they understand the customer relationships, they know which revenue is genuinely recurring and which is more fragile than it looks on paper. They believe, usually with justification, that the business will continue to perform.

A buyer is working from disclosed information, due diligence findings, and their own judgment about risk. They are being asked to pay today for earnings that will arrive in the future, in a business they do not yet control. The discount they apply to the seller’s view of value is not irrational. It reflects genuine uncertainty.

That difference in perspective is where the valuation gap comes from. Structure is how you bridge it.

Cash, Deferred Consideration, and the Space Between
At its simplest, a buyer pays cash at completion. For a seller, that is the cleanest outcome: certain, immediate, no ongoing dependence on the buyer’s behaviour or the business’s future performance.

In practice, many mid-market deals do not work that way.

Buyers regularly seek to defer a portion of the purchase price. This might take the form of a vendor loan (where the seller effectively finances part of the purchase), a retention held in escrow pending completion of post-settlement obligations, or structured deferred payments tied to the passage of time. Each of these arrangements shifts some of the economic risk back to the seller.

Earnouts: Shared Belief, Shared Upside
When a seller is confident in future performance and a buyer is not, an earnout can make both parties whole.

The mechanism is straightforward: a portion of the purchase price is contingent on the business achieving agreed performance metrics over a defined period after completion. If the business performs as the seller expects, they receive full value. If it does not, the buyer has paid appropriately for what they actually acquired.

Done well, an earnout converts a valuation disagreement into a mechanism that creates mutual upside if the business performs as expected. The seller is not asked to accept less. They are asked to defer part of the price until their confidence is proven. For a seller who genuinely believes in their numbers, that is often an acceptable trade.

The risk is that earnouts shift post-completion control to the buyer at the same moment the seller’s financial outcome depends on performance the buyer now influences. The period should be short enough to remain meaningful, with clear guardrails in place about how business performance will be measured and the consequences of that measurement.

When those conditions are met, it is one of the most effective tools available for bridging a valuation gap.

Deferred Consideration: Buying Time Without Giving Ground
Not every valuation gap is about fundamental disagreement on the business’s worth.

Deferred consideration is paid at an agreed future date, typically 12 to 24 months post-completion, sometimes with interest. The seller effectively extends credit to the buyer, accepting future payment in exchange for completing the deal now.

This structure can be a genuine bridge. It allows a buyer to use the business’s future profits to fund the acquisition and it gives a seller a clean exit from operations while retaining the right to receive full value over time.

The commercial terms matter: the portion paid upfront, the deferral period, the interest rate if any, the security arrangements, and the events that would trigger early repayment.

Sellers should understand the difference between deferred consideration, which is a contractual obligation to pay a fixed amount, and an earnout, where the amount is contingent on performance. They can be used together, but they are not the same instrument and should not be treated as interchangeable.

Retention: The Price of Uncertainty
Retentions are a narrower tool. They do not expand the total consideration; they defer release of a portion pending confirmation that the business is what it appeared to be. A buyer holds back a portion of the purchase price in escrow for an agreed period as a buffer against post-completion warranty claims or unexpected issues emerging from the business.

From a buyer’s perspective, a retention is a risk management tool. From a seller’s perspective, it is completion day money that has not yet arrived.

The negotiation is in the detail: the size of the retention, the duration of the escrow period, the specific conditions that can trigger a claim against the held funds, and the mechanism by which any unclaimed portion is released. Retentions can be reasonable and commercially appropriate (particularly where tied to a specific risk).

Rollover Equity: Staying In to Capture More
Often the most effective structuring mechanism, sellers are increasingly invited to retain a portion of their equity post-completion rather than selling everything at once. The business owner sells a majority stake, receives a significant cash payment, and reinvests a portion of the proceeds alongside the incoming buyer.

The logic is that the buyer and seller share a view of the growth the business can achieve under new ownership, and the seller wants economic exposure to that upside. If the business doubles in value over the hold period, the retained equity delivers a second, often substantial, return.

We have seen clients realise more value from their retained minority stake than from the initial cash consideration.

Retained equity aligns the parties interests as ongoing stakeholders in the organisation. It also aligns with more balanced negotiations, as both parties are dealing with their future business partner.

A seller open to retaining equity fundamentally reframes the transaction. Rather than a “sale” defined by what is leaving the business, the focus shifts to what is being brought in. A strategic investor with capital and growth ambitions makes for a far more compelling story when the deal is disclosed to the team and other key stakeholders. What sellers must understand is that retained equity is minority equity in a business they no longer control. The shareholder agreement governing that stake, the exit mechanics, the timeline and valuation basis for the next transaction, and the rights available to the seller as a minority holder all need negotiation upfront, to protect the ongoing interest.

Structure Is Not a Concession
There is a tendency among sellers to view any departure from all-cash-at-completion as a concession: something given away to get the deal done.

In the right circumstances, structure is not a concession at all. It is the mechanism by which a buyer who genuinely values the business at its full potential is able to pay for that potential, rather than only for what is certain today. A seller who understands the tools available can use structure to capture more than an all-cash offer from a more cautious buyer would have delivered.

Often the upfront consideration is the same as would be achievable if there was a strict requirement for an all-cash offer. Agreeing to share some of the risk generally leads to higher multiples, to the point where often the structured component is a genuine bonus.

The business owners and advisors who get the best outcomes are the ones who understand this distinction before they sit down at the table.

At DMA, we have worked through this dynamic in over 300 completed transactions. It is rare that buyer and seller agree on everything from the start. The deals that succeed are the ones where the structure was good enough to be the bridge.

Author: DMA M&A Advisor Michael Yared

In today’s market, very few business sales are completed as simple “cash-on-completion” deals. Most successful transactions include some form of structure, and for good reason.

At its core, price is always a function of risk and return. When a transaction is structured thoughtfully, the risk is shared between buyer and seller, creating alignment and often resulting in a higher total sale price than a straight cash deal.

At Divest Merge Acquire, we see structured components in the majority of mid-market transactions. The most common forms are:

Deferred payments: a portion of the purchase price is held back and paid later, often linked to milestones such as client retention or contract renewal.

Earnouts or bonus payments: additional payments contingent on future business performance.

Retained equity: the seller keeps a minority shareholding to participate in future growth.

Each of these tools balances risk, reward and control differently. When used strategically, they can be a win-win for both parties.

The Power of the Earnout and/or Bonus payment

An earnout is one of the most effective mechanisms for bridging a valuation gap. It allows a buyer to pay, say, 80 per cent of the purchase price upfront, with the remainder payable if the business meets agreed performance targets after settlement.

When structured fairly, it builds trust and rewards genuine performance. When poorly defined, it can create confusion and conflict. The best outcomes occur when both sides understand the commercial intent. The seller is confident they’ll be rewarded for delivering results, and the buyer avoids overpaying for future earnings that may not materialise.

Earnouts are often justified when the future growth is expected beyond current performance, but there’s still uncertainty about achieving those results. They allow risk to be shared, not shifted.

In its most commercially attractive form as a Bonus payment, the full purchase price is paid on completion, with an additional payment triggered only if higher-than-forecast results are achieved in the following period (for example, within 12 months post-completion).

Regardless of which variant is adopted, the key is clear, well-drafted guardrails that define exactly how performance is measured and how the business will be operated during the earnout period.

Typical guardrails include:

• The buyer must continue operating the business in the ordinary course and avoid actions that distort results.
• Performance (often EBITDA) is measured using consistent accounting policies and agreed adjustments.
• The seller receives regular management accounts to verify results.

Every earnout should be bespoke and developed collaboratively between buyer, seller, and legal advisers.

Retaining Equity – The Next Chapter

Another increasingly popular structure is retained equity, where the seller keeps a minority stake often 10% or 20%, while the buyer acquires control.

This approach allows the seller to share in the upside of future growth while maintaining a continued interest in the business they helped build.

To make this work smoothly, strong documentation is essential. Common protections include:

• A shareholders’ agreement setting out decision-making rights, dividend policy, and governance arrangements.
• Put and call options that define how and when the retained shares can be bought or sold and at what valuation.

When structured carefully, retained equity can allow a seller to receive substantial cash upfront while still participating in future value creation, effectively a “free carry” in the next phase of growth.

Why Structure Matters

In a competitive M&A environment, structured transactions are no longer the exception, they’re the new standard.

They reduce risk, align interests and often unlock value that a simple cash deal cannot. Whether through earnouts, deferred payments or retained equity, structure isn’t complexity for its own sake, it’s strategy in action.

Further Resources

For more insights, watch our short videos:

• Maximize business sale value with performance based earnouts – Video < Divest Merge Acquire
• Maximize the sale price (and retain part ownership for free!) – Video < Divest Merge Acquire
• Increase business sale value using put & call options – Video < Divest Merge Acquire

Building on the previously established framework for calculating a business’s average Net Working Capital profile, this article explores how normalising exceptional events can ensure an accurate and representative result.

Even with robust calculation methodology, working capital balances can be distorted by one-off or exceptional events. Normalising these events ensures that the calculation reflects the true underlying Net Working Capital requirement, free from distortions that do not represent ongoing business operations.

Some examples of exceptional events include:

• Bad debts which are abnormal in nature and remain in debtors over an extended period. If unrecoverable debtors are not identified and removed, average debtor balances can be artificially inflated.
• Changes in invoicing terms with customers or suppliers, or changes to accounting policies affecting working capital components. For instance, changes to long service leave recognition or a change in inventory valuation method. Any of these could render historical data less representative of current Net Working Capital requirements.
• Temporary operational spikes such as extraordinary projects or contracts that inflate stock, debtors, or creditors.

At Divest Merge Acquire, we prepare detailed Net Working Capital analyses for our clients to ensure the resulting average reflects the business’s true underlying requirements. Our approach is data-driven, consistent, and defensible, providing a reliable foundation for due diligence and completion adjustments, while delivering full transparency and confidence for both buyers and sellers.

When selling a business, the Net Working Capital requirement can have a big impact on the sale price. Steps must be taken to carefully define the Net Working Capital requirement of a business.

The higher the Net Working Capital target, the lower the goodwill component of the sale price, so it is in the seller’s best interest to justify the lowest Net Working Capital target.

Experienced buyers can often make valuable adjustments from unsuspecting business owners without being called out. Unfortunately, many lawyers and accountants do not appreciate the significance of this and may overlook how important this calculation is, which can cost the seller money.

A widely-adopted method to derive the Net Working Capital target is to take the month-end balances for a period, usually the last 12 months.

Month end balances often include two months’ trade debtors balances, being the current month invoices and the prior month’s invoices waiting payment at the end of the month. This often inflates the average, which benefits the buyers and hurts the seller.

It also restricts the window to close the transaction to a month-end. Otherwise, a mid-month calculation would more than likely produce a lower balance than the target, resulting in the seller having to cover the shortfall relative to the target.

Divest Merge Acquire goes to extra lengths to calculate the average based on daily balances for the past 12 months. Not only does this produce a balance that is usually lower than the month-end peaks, but it allows flexibility to be able to close the transaction at any time during a month.

Many clients have benefited from this practice. It is one of the many ways Divest Merge Acquire adds extra value for its clients.

This article is one of a series being published by Divest Merge Acquire demonstrating ways M&A Advisors can assist business owners optimise their sale outcome.

When selling a business, one area that is often misunderstood is how employee entitlements are treated in a deal and this can cost you money.

Many lawyers and accountants do not fully understand how to calculate these, which can mean the seller loses part of the sale proceeds.

Employee entitlements can be classified in two ways during a sale, as third party debt or net working capital.

The degree to which employee entitlements can be classified as net working capital allows them to be transferred without being treated as a debt adjustment.

Liability items that form part of net working capital are the seller’s friend, as they become credits to reduce the net working capital requirement of the business. The lower the net working capital target, the higher the goodwill component of the purchase price.

Buyers would love all the employee entitlements to be treated as debt, deducting the total amount from the purchase price as a debt adjustment. Unsuspecting business owners can fall prey to this harsh and unfair treatment.

The extent to which employee entitlements are treated as debt, they are a deduction from the purchase price, which then should be mitigated by the implied future tax deduction available, which may be 70%-75% of the gross amount, depending on the company tax rate.

Here is how we recommend mutually fair treatment of the various entitlements
The 3 main element of employee entitlements are annual leave, long service leave and personal leave.

Personal Leave
Firstly, no adjustment should be made for personal leave, which is a contingent liability only. At most, only an indemnity could reasonably be offered to cover a nominated period after completion to the degree that the aggregate of personal leave taken exceeds the net new entitlement.

Annual Leave
The accrued employee annual leave entitlements of an employee:

(1) up to and 4 weeks accrued will be treated as a Working Capital Liability Item; and;
(2) in excess of 4 weeks accrued will be treated as a Third Party Debt and deducted from the purchase price,

Long Service Leave
The accrued long service leave entitlements of an employee:

(a) with less than 10 years’ service to be treated as a Working Capital Liability Item;
(b) with more than or equal to 10 years’ service but less than 15 years:

(i) will be treated as Third Party Debt up to 8.67 accrued weeks; and
(ii) will be treated as a Working Capital Liability Item for amounts in excess of 8.67 accrued weeks; and

(c) with more than or equal to 15 years’ service will be treated as Third Party Debt.

When evaluating the factors that influence business value, attention is often directed toward revenue, customer loyalty, or brand reputationn. But one often-overlooked factor that can quietly chip away at a business’s value is stock.

Inventory, especially when it’s excessive or outdated can be a silent threat. It’s not just about cluttered shelves or full warehouses. Stock levels play a direct role in how a business is perceived, how efficiently it operates and its goodwill value.

Why Too Much Stock Is a Problem

Excess inventory usually builds up due to overordering, inaccurate demand forecasting, or sudden market changes. While it may seem harmless, it can send the wrong message to potential investors. Large amounts of unsold stock may suggest poor planning, outdated systems or weak sales.

High stock levels are often the bane of import/wholesale businesses. It may be necessary to provide stock buffers for security, stock in transit, achieve economic order discounts and cover shipping and supply disruptions. Ordering direct from overseas suppliers has positives and negatives in terms of business value.

The Financial Impact

Idle stock ties up capital that could be used for growth, innovation, or improving operations. It also impacts cash flow, which is the lifeblood of any business.

Even small improvements in inventory management can lead to big gains. For example, a 1% increase in gross margin, achieved by better stock control, can translate into significant added value.

Alternative models may include buying from local wholesalers at higher prices but overall requiring less cash tied up in stock on hand. Although profit margins may be lower, the lower business valuation may be more than offset by less of that value attributed to stock and a higher goodwill component.

Accuracy Matters

When selling a business, buyers and their advisors may want to see accurate historical stock records.

As inventory can have a direct effect on a company’s profit and loss, a purchaser’s advisors will scrutinise the accuracy of the opening and closing stock levels quoted in the financial statements.

Further, transactions that involve a significant amount of inventory, an independent stocktake may be required prior to closing.

Excess stock, ways we can mitigate the effect

If there is a genuinely unnecessarily high level of stock on hand that can be reduced without negatively impacting margins, we can notionally ‘ring-fence’ the excess component and exclude from the business enterprise value. It can then be either purchased at an additional price or allowed to be sold off by the seller before completion. Another option is to allow this stock to be held on consignment by the buyer and paid for at cost when the new owners still it at a profit, resulting in a potential win-win.

What Counts as Excess?

It’s common for purchases to negotiate a lower cost price on excess or aged inventory. Buyers often consider stock held for more than 6 to 12 months as “slow-moving” or “dead.” Identifying these items early allows businesses to clear them out, free up space, and avoid negotiations.

A Smarter Approach to Inventory

Streamlining inventory isn’t just about tidying up, it’s a strategic move. It improves efficiency, boosts cash flow and sends a clear message that the business is well-run. And when it comes time to sell, that can make all the difference.

Managing stock wisely and accurately is more than good housekeeping, it’s a key driver of business value.