Succession and Exit
How To Really Maximize The Value Of Your Business (1st Oct 2013)
The main goal when selling a business is to fully extract its maximum value, in order to do this you need to have an exit strategy. Unfortunately most owners don’t have a plan or strategy when it comes to exiting and so fail to either maximise or extract the value. There are eight key internal aspects that influence the business’ attractiveness and saleability. There are a further eight external factors that prepare the business to attract the right buyer.
Most business owners go into business planning to maximise the value of the business and extract that value (most often by selling) when they exit. But the research tells us most don’t have a plan or strategy around how to do this and therefore often fail to either maximise the value or extract the value or both.
Achieving a successful outcome is really around focus on two areas:
Internal – what are the key things we can focus on to ensure our business is valuable, attractive and saleable?
In my experience there are 8 key areas;
- Size – simply put ‘size does matter’ – there is much research that supports the fact that businesses with a turnover of $5 million or more nearly always sell at higher multiples than their smaller counterparts. Whilst I am not in favour of growth for growths sake, designing your business to grow to at least this level of turnover will maximise value.
- Business model – is your business boutique or scale and even more importantly is every aspect of your business – customer service, online presence, the people you employ, your pricing strategy, your marketing materials (I met a financial adviser just last week who told me he looked after high net wealth individual clients, was extremely good at what he did and as a result charged a premium – he then gave me a business card on very flimsy paper that looked like it had been printed as cheaply as possible ) aligned with your model.
- Revenue – recurring revenue is worth more – do you have clients on long-term retainers, extended contracts, or some type of residual income trail.
- Sales and marketing – your business needs to be able to generate new business, leads, enquiry and ultimately sales without relying on either you or a key person’s skill and sales ability. All businesses need a sales and marketing machine.
- Systems – Save Your Self Time, Effort & Money – not only are systemised businesses far simpler to run, far less stressful and generally far less risky but they are also more valuable.
- Employees – do you have an employee incentive plan whereby employees are rewarded based on performance – either a profit share based plan or ideally an employee share ownership plan (ESOP). This substantially reduces one of the key risks for buyers – that is that your employees will exit when you do!
- Corporate governance and compliance – often ignored by business owners as either something large businesses need to worry about or simply too hard and far too boring but this area (particularly when we look shortly at attracting the right type buyers) can add considerable value and again reduces risk.
- Owner dependence – the business must be able to run independently of your involvement you must be able to leave for two months on a holiday in Europe without contact with the office and the business maintains, continues and even improves its performance whilst you’re away.
External – what do we need to prepare to attract the right buyer ( who will pay more ) ?
Having bought or sold several businesses over the last 15 years, several factors stand out:
- Strategic buyer – for every business there is a strategic buyer who will pay more for your business simply because they benefit more than most other buyers – the most common example is complementary products and services.
- Information memorandum (IM) document – it is amazing to see the number of businesses (otherwise quite valuable) who are prepared to sell their business on the basis of a cheap, home-made “flyer” style document. A well prepared IM will be able to attract and convince the right buyer.
- Tax planning – every exit has several different elements of taxation, nearly always CGT, often stamp duty and sometimes other taxes as well – inadequate planning in this area can cost you a large percentage of the sale price in taxation.
- Due diligence and documentation – many transactions fall over at this point but this can actually be used to assist in improving the value of the business. If all of your documentation is complete, accurate, and up-to-date and demonstrates a well-managed business it will support your value proposition not detract from it.
- Negotiation – being in a position to create some competitive tension (by attracting several of the right buyers) is a good start, but the conduct of the negotiations and discussions leading to the actual sale are a very important aspect.
- Legal agreements – often business owners are concerned that the legal agreements will ‘scare off the buyer’ – this is very rarely the case. Far more importantly, the legal agreements need to be structured to protect are you after the sale particularly around the key issues of any warranties, assurances provided and also any event or finance included as part of the sale terms.
- Corporate advisers – business owners should not try to sell without the best advice. Well represented businesses are generally taken far more seriously and are perceived to be far more valuable. A corporate adviser who has a reputation for selling good-quality businesses automatically positions your business in that category.
Importantly, post exit you also need assistance with asset protection estate planning and ongoing investment planning the change from business owner to self-funded retiree is substantial.
The correct implementation of the items outlined above will achieve two key outcomes – maximise the value of the business and successfully extract that value upon exit!