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The Tsunami is Coming!

Merge Acquisition Business Sale

A person’s business is often their largest asset, and so it should be as you need to be rewarded for all your hard work, personal sacrifice and risk.  However, selling your business is a very complex process and getting what you want for your business is incredibly difficult.

To put this into perspective, there are over 2.5 million businesses in Australia and over 80% of these businesses are privately owned. Collectively they are worth trillions of dollars.  Some of the data in relation to these privately owned businesses is very concerning:-

  • The average age of the business owner is 58.
  • 25% are over the age of 65.
  • 64% would consider selling their business if approached.
  • 55% of business exits are due to forced exits such as financial distress, death, ill health, divorce or some other unforseen circumstance.
  • 51% plan to use the proceeds from their business to fund their retirement.
  • 12% have a documented exit plan to maximise the value of their business.

Couple this with broader macro data:-

  • The first baby boomer turned 65 in 2011.
  • In excess of 5,000 people a week will turn 65 for the next 15 years.
  • It is estimated that two-thirds of SMEs in Australia worth more than $3 trillion will changed hands in the next 10 years.
  • Since the GFC business values have fallen and the market has dried up so there is now a huge backlog of business owners wanting to sell their business.
  • Since the GFC High Net Worth individuals, superannuation funds, private equity funds and other investors have been very risk adverse and have collected huge amounts of cash ready to invest into the right asset. They just can’t find the right assets.

So all this data is saying is that there is potentially a ‘tsunami’ of owners wanting to exit their business over the next 10 to 15 years and it is going to be an incredibly competitive and noisy market place.

However, there is a tremendous opportunity to take advantage of these circumstances if you strategically plan for your exit from your business.

The aim of any ‘Exit Plan’ is to maximise the value of your business and ultimately the amount you receive or the ‘net proceeds’ of the sale, by:-

  • Getting your business ready to sell.
  • Making your business attractive to potential buyers.

Getting your business ready to sell

Firstly, you need to understand what you’re selling (i.e. the whole business or just the assets of the business) and then what someone will realistically pay for you for those assets.  Most owners think their business is worth more than it actually is. These idealistic expectations can derail your plans if you don’t get a suitably qualified expert to give you a realistic value of the business.

We met a business owner who didn’t like it when I told him I thought, in the current market, his business was worth $15 million because his accountant had valued the business at $30m six months earlier.  He actually knocked back an offer in excess of $20 million.  Now to due changes in the business and the market the business is worth less than $10 million and they can’t find anyone to buy it.  Unfortunately these stories are far too common.

To get your business ready to sell you need to start by removing all the emotion from the process (which is nearly impossible) and think like a potential buyer of your business.  What would a potential buyer be looking for if they were going to buy your business?

Any serious buyer will do a due diligence on the business before they commit to buying it. A due diligence is a thorough review of not just your financials but also all the non-financials in your business – the management, systems and assets. This is so they can fully understand what they are buying and to make an assessment on what they should pay for the business.

To get the business ready you should effectively do a due diligence on your business to make sure you have everything a potential buyer would be looking for.  As a minimum a potential buyer would want to see the following information before buying the business:-

  • Financial statements for the last 3 year financial years
  • Management accounts for the current financial year
  • Budget for the next financial year
  • A history of consistent, stable earnings
  • Details of how the business makes its money i.e. Sales and profit by customer, product, geographical location etc.
  • List of all assets highlighting those being sold and not being sold and the value of each asset
  • List of aged debtors and creditors
  • Inventory or stock on hand report
  • Copies of all contracts with external parties i.e. customers and suppliers
  • Trading terms of suppliers and customers
  • Tenancy details including copies of any leases
  • Organisational charts
  • Employment records
    • Job descriptions
    • Employee files
    • Employment contracts, awards, EBA’s
    • Salaries and wages details
    • Leave entitlements
    • Statutory obligations i.e. super, payroll tax, PAYG and Workcover
    • Total cost of employment per employee
  • Business plan, marketing plan
  • Company profile, marketing material, website
  • Details of all IT systems and software licences
  • Quality, Safety and Environmental policies and systems
  • Details of all insurance policies
  • Details of any legal matters pending
  • Copies of any licences, patents, accreditations required to operate the business

Make your business attractive

The final and most important step is to make your business attractive to potential buyers so that it stands out from that competitive and noisy market we spoke about earlier. It can also increase the number of potential buyers, the less risk that your business carries. This is the crux of exit planning and can take between 12 to 24 months to do properly.  Examples of some of the areas we focus on during the exit planning process are:-

  • Firstly, the business needs good, consistent earnings to be attractive. Modest growth in earnings over the last three years is ideal.  Unsustained, opportunistic growth is not looked upon favourably as the future earnings are likely to decline or be extremely volatile.
  • The success of the business shouldn’t be dependent on one individual, especially the owner. A business with an experienced management team operating in a structured and systematic corporate governance environment is always more attractive to buyers than one where there is one dominant individual that is a ‘law unto himself’.
  • Having diverse and varied sources of revenue is always looked upon favourable. This may mean diversification through various product and services, geographical diversification or a customer base that is not concentrated around only a few customers.  One customer should not be more than 20% of your revenue.
  • Potential investors in any business love long term contracts with customers because it indicates greater certainty of future earnings. Long term customer contracts are as rare as ‘Hayley’s comet’ in today’s marketplace but long term relationships with your customers is the next best thing.
  • You need to set yourself apart from everyone else vying for the investors’ attention. Having niche products or services and a competitive advantage over your competitors will help you do this.  Having a scalable business model that is a good strategic fit for the potential buyers is also advantageous.
  • Your business will be more attractive if you are in a growth industry as opposed to one stagnating or in decline. Market sentiment about your industry or local economy will always have an impact.

I assume you would have noticed that if you implement a concerted plan to get your business ‘ready’ to sell and ‘attractive’ for potential buyers by focusing on the areas highlighted above you will end up with a very successful, well managed business.

At this point, many business owners choose not to sell their business because they have fallen back ‘in love’ with their business.  At least now business owners have ‘options’.  They can either sell their business for what it is worth or they can continue to own it and make the money they want without the hard work previously required and without the risk.

What options do you have in your business today?

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