The document provides advice on maximizing the value of a business for sale by focusing on succession planning and finding a strategic buyer. Some key points:
- 55% of Australian business exits are due to failures like bankruptcy or illness rather than planned succession.
- Business owners need to dedicate time to strategic succession planning to attract well-prepared buyers and maximize sale value.
- Finding a strategic buyer who can leverage your business's value, like Apple purchasing voice recognition software, can yield a higher sale price than the business is worth.
- Owners should relentlessly focus on attracting strategic buyers by aligning their business with potential buyers' products and customers. This can result in premium prices like Facebook
Maximise business sale value with strategic planning
1. FINANCE
How to maximise your
business sale value
In this first instalment in a series of features, strategic
accountant and business adviser Craig West explains
the importance of setting up a bankable succession
strategy for when you exit your business.
M
any business owners are looking throughout this period, and therefore a Every entrepreneur’s
to maximise the value of their buyers’ market exists. fantasy
business so that one day they can Only well prepared and structured This first instalment will focus on every
sell it and fund their retirement. But while businesses will be able to be sold entrepreneur’s fantasy – a strategic sale to
that may be the plan, very few business successfully. And to maximise the value a buyer who pays more than anyone else
owners successfully achieve that outcome. of their business on exit, business owners because they absolutely have to have your
In fact, in Australia 55 per cent of need to look for a strategy which will make business. This buyer can then leverage the
business exits are the result of some kind of their business more attractive than the rest value you have created, allowing them to pay
failure – be it divorce, a partnership dispute, of those on the market. But enough of the more than most potential buyers believe the
death, illness, bankruptcy, and so on and so doom and gloom. business is actually worth.
on. While we have many successful long- Why would someone be interested in
term SMEs here in Australia, the statistics paying you more for your business than
“
55%
are not encouraging in terms of survival it is really worth? To quote the ludicrously
of the business through and beyond a successful Warren Buffett, “price is what you
succession event. pay, and value is what you get”. This means
The main reason that this has become that you need to find a hook that will allow
such an issue is that business owners are of business someone to extract far more value from your
typically so caught up in the many aspects of business than most other buyers (and indeed
managing and running their business – and exits are the yourself) are able to extract.
ensuring its compliance with the myriad of There are many examples of these
regulations, rules and laws that govern SME result of some type of transactions – but to ensure the
activity – that they very rarely have enough concept is solid, we can look at some simple
time to dedicate to strategic succession kind of failure.” hypothetical ‘deals’. The value of a business
planning. This then has the potential to who designs voice recognition software,
jeopardise the very purpose for which they such as that used in Siri in the iPhone 4S,
entered into the business in the first place – is far higher for Apple, which has the market
to build it up to sell to fund their retirement. There are countless articles around that position to leverage that technology, than
With the first baby boomers having highlight the succession and exit planning for a company who is hoping to add the
turned 65 years old in 2011 and population issue, but very few that propose a solution. feature to a new, unproven product with
statistics showing the birth rate of baby This series of features will bring you insight a limited market.
boomers growing every year for the next into the five most important succession The value of MYOB was significantly
18 years, every year from 2012 through to strategies that will allow you to maximise enhanced (in its November 2011 private
2029 will see the number of baby boomer the value of your business – and, even more equity sale for 11.3 times earnings) to a
business owners consistently growing. This importantly, will outline strategies to extract buyer who could leverage the more than
means that the supply of businesses on that value upon exit to successfully fund your one million Australian and New Zealand
the market looking to exit will be constant prosperous retirement. businesses who use MYOB on a regular
44 MAY 2012
2. FINANCE
basis to manage their accounting and and make the value (with leverage) more that were aligned with products from the
compliance needs. and more obvious. And keep on doing this seller’s company; focusing PR efforts on
Given that right now, according to until a strategic buyer cannot avoid you product announcements; and even making
Bizexchange, the average SME is selling for any longer. an aggressive effort to recruit key staff form
approximately two times its earnings, these Some businesses I have worked with the potential buyer!
strategic exits can add substantial retirement previously have gone to considerable lengths A word of warning though – this is not a
funds to your account. to attract a strategic buyer. These lengths quick fix and these sales typically take a lot
In order to prepare for and execute a have included opening an office in another of preparation and work. But if implemented
strategic sale, you need to be relentlessly state and focusing on marketing to the correctly, they can yield substantially higher
focused on that outcome. The business buyer’s existing clients; offering preferred sale prices for your business which, at the
needs to be built, managed and driven pricing to customers of the strategic buyer end of the day, is the reason most SMEs
towards a carefully identified buyer who who use certain products from that company exist in the first place.
will pay you more when you decide to sell.
Your every decision needs to be targeted
towards making your business irresistible to
a strategic buyer.
Stephen Covey, author of The Seven
Habits of Highly Effective People, says his A winning example
second habit is “begin with end in mind”. But
many business owners actually lose sight of of a strategic sale
that habit and very quickly end up getting
caught up in the day to day issues of running In early April, social network behemoth
their business. Unfortunately, this is not Facebook paid a reported $US1 billion,
the sort of thing that will attract a strategic in a combination of cash and shares,
buyer – and it definitely isn’t the sort of thing for popular photo-sharing app Instagram.
that will entice them to pay more than your
business is actually worth. Instagram is a mobile sensation that
Some other common reasons businesses counts Twitter co-founder Jack Dorsey
make strategic acquisitions of other among its backers. In its short
businesses are: existence to date, it has been
• To expand geographically into a new area. downloaded by more than 30 million
(Just Water (NZ) acquiring Clearwater people. The US$1 billion price is the
Filter Systems (Aust)). highest paid for a profitless start-up
• To add your product to their existing since Google bought YouTube for
loyal client base. (Facebook’s recently $US1.65 billion in 2006.
purchase of Instagram (see right).
• To purchase a client base to allow sale of Given that Instagram took a mere
other products (MYOB purchase). eight weeks to build and launch, and the
• To remove a competitor from the fact that it was profitless and only two years old when Mark
marketplace (Commonwealth Bank’s Zuckerberg and co acquired it, the massive price tag seems
purchase of Bankwest). incalculable to the untrained eye.
• To leverage an existing business through
market branding and position (Yahoo7’s But don’t you just wish you were on the receiving end of that deal,
acquisition of Spreets – for $40 million as were Instagram founders Kevin Systrom and Mike Krieger?
based on less than 12 months trading). And this is exactly the sort of thing we’re talking about here.
You need to be relentlessly focused
on the outcome – do everything you can
to make your business more attractive
45