Is your business “exit ready”?

By Michael Royal, BIR Solutions

In today s press and at many business seminars, we hear statistics about Australia s ageing population, our low birth rate and our low net migration. We are also told that many owners of SMEs will be making a decision regarding their retirement in the next 5 to 10 years.

What this means for many business owners is that over this time frame, there will be more and more businesses being put on the market for sale but with a smaller number of potential buyers. This will put downward pressure on the sale price of many businesses.

For those business owners preparing for the inter-generational transfer of ownership and control of their family business, the issue of downwards price pressure on the value of businesses is equally relevant as the valuation is integral to any division of non-cash family assets amongst family members.

This article addresses two critical issues:

  • What you can do to maximise the value of your business no matter when you are planning to exit;
  • The steps you can take to achieve above average value for your business.

As the above illustrated demographic scenario unfolds over the next decade, three categories of business owners will become evident:

Category 1 those business owners who have thought about their exit strategy issues and have taken appropriate action to prepare for their exit. These business owners will have considered everything I am about to cover. They will be prepared and they will have given themselves plenty of time to get things properly sorted out. These business owners will have a good chance of maximising the value of their exit strategy.

Category 2 those business owners who have done some thinking about their exit strategy but have not put all this thinking into practice. In terms of determining their status of exit readiness , some of these business owners will be better prepared than others. Some of them will have addressed and dealt with some of the issues raised below but others will not have made much progress at all.

Category 3 those business owners who are operating on the basis of business as usual and who have not really given any serious thought to their exit strategy. Many of these business owners are either in denial of the future (often through fear of the unknown) or they are not considering retiring in the foreseeable future and so they do not believe there is any benefit in being exit ready .

For many business owners, preparing for exit can seem like a complicated process and, it can take up a lot of time and energy. Preparing for exit requires planning. And planning requires taking time out from your day to day routines to sit back and look at your business. It is akin to the expression working on your business compared to working in your business . We all know we should be doing the former but that can prove a major challenge for the busy business owner who feels that everything depends on them.

Not surprisingly, with all this talk about being exit ready, a market has been created for the development of tools which can assist business owners and their advisors prepare for exit. Many of these tools are simple to use and can be easily implemented.

At BIR, we use a methodology devised by Professor Tom McKaskill, who holds the Richard Pratt Chair in Entrepreneurship at the Graduate School of Entrepreneurship, Swinburne University. Tom developed his methodology having done some very successful business start ups and sales in the UK and the USA. From his practical experiences in achieving extraordinary exit value from the businesses he set up / acquired / sold, he developed a methodology for others to follow.

Whilst Tom s methodology is primarily based around extracting above average value from a sale exit strategy, the steps he recommends you follow are pretty much the same even if you are passing on the business to other members of your family assuming of course you want to pass it on it good shape.

As many of you are aware, the typical business valuation model used to value businesses focuses on a multiple of the seller s adjusted earnings. The science behind the application of these multiples and the adjustment process is often confusing to all but the valuers as they take into account concepts such as industry practice and risk which are often hard to define at the best of times.

Using Tom s approach, the value of a business which has a strategic value to a purchaser can often be formulated on a financial model based around the opportunity presented to the purchaser by the strategic value they will utilise rather than the current operating performance of the seller.

The trick for a seller (and which is explained in a bit more detail below) is to identify the strategic value for potential purchasers and communicate this value to the potential purchasers in such a way that they will see the inherent value for their business if they acquire it and/or the inherent risk to their business if they do not acquire it (particularly if someone else does).

For many business owners, the achievement of above average value for their businesses may not seem possible. However, often it is a case of looking at your business in a different way and seeing things from a potential purchaser s perspective. That is where the use of a recognised methodology like that created by Tom McKaskill and as used by BIR can come into play.

Even if, after due consideration of your business, there is no obvious strategic value to a potential purchaser, the steps below still apply. However, there are a few additional steps which can be undertaken to maximise the value of your business. These additional steps will be the subject of a further article.

The steps to achieving above average value from your exit strategy where there is strategic value to a purchaser are based upon a number of common sense concepts.

  1. Reduce your business risk for your potential purchasers

    Every purchaser will attempt to discount the purchase price if they perceive there are risks in the acquisition and far too many sellers do very little to eliminate these risks before the sale process begins.

    For the business owner, implementing risk reduction strategies is just good business practice. Reducing business risk generates additional benefits in how the business is operated and in improving the bottom line and more importantly, the consistency of the bottom line.

    ACTION ITEM: When getting businesses sale ready, BIR uses a checklist to assist in reducing business risks. Getting to a position of sale readiness is not a complicated exercise but it can take time to get things sorted out and properly documented so that a purchaser would feel comfortable that the risks have been significantly eliminated from their equation.

  2. Identify the right purchasers and understand what they want to purchase

    Purchasers are prepared to pay top dollar for those things they need and will heavily discount the purchase price for those things they do not need and/or which might prove to be an issue they have to deal with post-sale.

    And, to complicate matters, not all purchasers will need the same things from your business and the things of value to you may not be of value to a purchaser and vice versa. Further, some of these potential purchasers you will know well, whilst others are currently unknown to you and may even be located interstate or overseas. There is a lot of work to do!

    ACTION ITEM: BIR uses a checklist to determine the potential purchasers and the assets which could be of value to each of them. To do this, you need to know your business and what creates and could create value for each of your purchasers. You then need to work out whether the sum of the parts of your business are worth more than the whole in other words, are there potentially different purchasers for different parts of your business who can create more value for you than a single purchaser of your entire business?

    From these comments, you can probably guess we are not a fan of the place the advertisement in the paper and see who responds approach. Whilst for many businesses this may often seem the best way to go, it is surprising how many business owners can extract strategic value from their business by doing a bit of homework on who are the buyers who could most benefit from the attributes of their business.

  3. Competitive tension is the key

    To make a sale work to your advantage you can either bluff your way to a higher price or you can have more than one interested party ready to buy from you.

    The latter strategy is by far the better approach to adopt. If you have a few very interested purchasers who understand the strategic value and opportunity which your business provides them, you are more likely to achieve a higher price.

    ACTION ITEM: BIR s approach has a number of simple steps which can be used to elicit interest in your business from a number of potential purchasers and get them up to speed with the benefits of your business before the sale process begins. It is critical to generate their interest before you are ready to sell as to leave it until the sale process is under way might result in a potential purchaser being under-prepared and therefore not being able to make a proper assessment of the value of your business to their operations.

  4. Make sure all internal stakeholders are singing from the same hymn sheet

    In getting a business exit ready, it can get quite complicated when there is more than one person involved, which, unless you are the sole employee of your business, will be the case.

    This rule particularly applies when the second person is also a director and/or a shareholder and/or a senior/critical employee of the business.

    Each of the key internal stakeholders must have an exit strategy which is consistent with their own desires and expectations, otherwise they can create unnecessary problems either pre-sale or post-sale (and many post-sale issues can lead to expensive litigation if not handled correctly).

    ACTION ITEM: BIR s approach ensures that all stakeholders concerns have been addressed and are properly understood and resolved before the sale process begins.

  5. Keep time on your side

    Once a business is known to be For Sale , the race has begun. You cannot slow down the race while you get ready or while you try and excite the interest of a potential purchaser as the other potential purchasers who are already in the race might run off and lose interest.

    So, the lesson here is to be prepared for exit (and always being prepared is even better) and, when you are ready to start the race, sound the gun and let all parties know they can join in.

    In Tom s view, getting exit ready as per the above steps can take up to two years so if you are thinking of selling, you have a fair lead time before you will be able to say with some comfort I am maximising my value from my exit strategy .

    ACTION ITEM: Exit strategies need to be planned. Using the methodology developed by Tom McKaskill, BIR has a simple 1 to 5 scoring system to determine how sale ready you are in each of the areas set out above. As you accomplish certain tasks, you move further along the scale towards being exit ready.

Tom s methodology for strategic sales is recorded in The Ultimate Deal 2 . If you wish to purchase this book, we can get it delivered to you so please contact us on the details below.

If you are interested in the application of Tom s methodology but do not have the time to do the reading of Tom s books, please contact us to find out how we can work with you to achieve above average value for your business.

BIR s approach is to work with you and your financial and legal advisors to make sure we achieve the best result for you.

You may only get one chance to get yourself exit ready so it is important to plan it and get it right. BIR will be able to assist you achieve this result.

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