A successful exit strategy is generally not achieved overnight and should be based on a significant period of careful preparation. Business owners should start preparing for sale as soon as is practically possible. In fact, drawing on the approach taken by professional investors such as private equity firms, the ideal time to start is the day one buys or starts the business.
Having worked on the buy side of many transactions our experience tells us value is eroded or worse still, deals ‘fall over’, when material issues and weaknesses are identified during the due diligence process because the target business has failed to properly prepare for sale.
We recently acted for an overseas client who acquired a local business. The transaction took nearly two years to complete due to the number of issues that were uncovered during a very lengthy due diligence process that had to be dealt with. This represented a massive distraction for the owners at a time when they needed to be focused on the business. Fortunately the deal did complete, but at a significantly lower purchase price than was originally agreed.
Most aspects of preparing for sale are simply good business practices. We recommend all business owners consider the following recommendations:
1. Change your mindset and think like a buyer
Owner operators tend to be very emotionally attached to their businesses, particularly where the enterprise has been built over a long period of time or has been passed down from past generations. Unfortunately this emotional attachment stops owners thinking of the business as a valuable asset and doing the things they need to in order to extract maximum value. By letting go emotionally owners can think about creating something more valuable for the next owner. This means re-investing appropriately for the future and not deviating for short-term gains as well as identifying and addressing obvious weaknesses.
Business owners should think hard about how a buyer might value the business. For example, growing businesses with good prospects generally attract higher valuations. Owners should commit to a long-term business strategy with key growth milestones and look to identify both organic growth and acquisition opportunities.
2. Reduce owner dependence
Owner dependence is one of the biggest challenges for private and family-owned businesses. This means a buyer is faced with the challenge of acquiring the owner’s personal goodwill which can create a major impediment to a transaction or lock in the existing owners for significantly longer than they would otherwise like. We’ve acted for a number of clients that are locked into long periods of post-completion employment with deferred purchase price arrangements, simply because the buyer could not take on the risk of buying their business without a lengthy transition period.
As a business owner you should focus on removing the business’ dependence on you by developing your management teams and looking at ways to systemising the business so relevant knowledge and expertise is disseminated through well-structured and easily transferable processes and systems.
3. Getting the house in order
Getting the house in order represents best practice for any owner in the normal course of business. In the event of the sale an orderly business will facilitate the sale process and give a buyer significantly more confidence.
Key areas for focus in this regard are financial, legal and operational matters and include the following considerations:
- A clearly articulated business plan/ strategy and robust financial projections
- Good quality monthly management accounts and annual financial statements
- Strong cash flow and working capital management practices
- An appropriate corporate structure that avoids the need for a potentially costly restructure at the point of a transaction
- Sale friendly business contracts that are easily transferable to a new owner
- Secure rights to key assets (eg premise leases, protection of IP)
- Ensure appropriate contracts are in place to secure supply arrangements with key customers and suppliers
- Appropriately invest in the business’s assets and infrastructure
- Eliminate known material risks eg resolution of litigation disputes
4. Think about and identify who the best and most likely buyers are
Typically it is easier to set up a deal where existing relationships exist. The more familiarity potential buyers have with your business, the more they will trust you and have a good understanding of what the opportunity means to them.
There are different opportunities to ‘get on buyers’ radars’, including:
- Taking advantage of industry functions and conferences to meet and get to know executives of potential buyers
- Having informal meetings with CEOs of potential buyers to share ideas and investigate partnering opportunities
- Using existing formal relationships as a means to building bridges (e.g. distributors, suppliers, joint ventures)
- Working closely with the ‘right’ buyers, pro-actively helping them to understand the business and its growth opportunities
These principles are relevant for a business at any stage of its evolution. What’s more, the timing for the sale of your business is everything and more often than not you will achieve the best outcome by selling your business when a buyer wants to acquire you, not necessarily when you want to sell. Being organised and ready to go when an attractive buyer emerges is a powerful asset.
This article has been provided by Deloitte Private and the advice is designed to be general in nature.
For more information please contact Austin Scott, partner at Deloitte Private. Ph: 02 9322 3861 or AuScott@deloitte.com.au.
Austin has extensive experience in corporate finance transactions advising private and family owned businesses in the execution of M&A strategies.