Look Forward to A Successful Business Sale.
Written by Mark Ostryn – Mergers & Acquisitions Specialist, LINK Corporate, LINK New South Wales – November 2014
You’ve built up a sizeable business. It’s profitable and still growing, but you know there’s more to life than 65 hour weeks. You’re an “empty nester” and keen for more golf and extended vacations. You’re ready to sell. However, your financial advisor tells you that thanks to the exiting baby boomers, businesses are trading at lower multiples values than ever. You’ll need the proceeds from your business sale to fund your superannuation. Time to get out, but how do you maximise your sale value?
There may not be many participants in your industry who have the spare funds to invest in acquiring your company. The larger your company is, the less the number of participants. Many are already known to you, so there’s a likelihood that when you sell, your M&A advisor will be facilitating some kind of auction process. So what’s your action plan in the 18-24 months, before the auction process starts?
Firstly, identify these players.
They may be direct competitors of yours now, or they could be interstate or overseas operators who know that buying the niche you’ve worked hard to carve out is cheaper or less risky than trying to do it themselves. But think beyond that. Which companies in related industries (or those companies in a different stage in the supply chain to your company) would also benefit from acquiring your company?
Now think about how your industry will change in the next two years and what these companies will need from your company. Perhaps it’s access to your client database, or your skilled and knowledgeable employees, or your IP, or your brand? So work on strengthening those assets. The more value an acquirer can see in such assets, the higher the price they’ll be willing to pay for your company.
Secondly, monitor and track industry developments.
Competitive intelligence technology has progressed to the stage where you can set up news and company alerts on every mover in your industry. What announcements have they made? How has their website changed? What product innovations have been made in your industry and how are they impacting the market? What related industries are slowly aligning themselves with your industry? What substitute products and services are becoming available that could threaten your industry? There’s a wide range of electronic tools for sophisticated tracking. Some are free like Google Alerts, others like D&B 360 and IBISWorld are subscription based, but a sophisticated M&A company like LINK Corporate can utilise these tools on your behalf.
Thirdly, be flexible with the terms of the deal.
When the time comes to sell, don’t be in a hurry to depart. Even if you’ve done your job correctly, and worked hard to restructure your company to lessen the dependency on you, a smart acquirer is buying on the basis of synergies – i.e. 1+1=3.
Their motivation behind the acquisition is that they can see opportunities to increase the profits of your company and the profits of their core operations. To achieve that they’ll need your expertise and experience in transitioning, in maintaining the loyalty of your key people and in ensuring that the strengths of the two sides of the merged operation flow through to the other. Consequently, you may not receive the full sale price on exchange of contract, and deferred payments may well be linked to future performance. Accept this reality and enjoy the challenge of being a pivotal person in the merged operation.
Good luck with the next few, inevitably bumpy years and remember the three key messages in a successful sale – plan ahead, monitor and track industry developments and prepared to be flexible with the deal and your eventual exit.
Ten questions before you buy a company.
By Mark Ostryn – Mergers & Acquisitions Specialist, LINK Corporate
You’re contemplating buying a company because you believe that you can improve the financial performance of not just that company, but your own as well. That’s called synergies or more crudely 1 + 1 = 3.
Well, first of all have a think about how best your own company can grow. Once you’ve got a plan and a framework for how best to achieve this you are in a better position to determine what kind of company you need to acquire (alternatively, you may find that internal / organic growth, or growth through collaboration / strategic alliances is less risky or more profitable).
Here’s a list of 10 questions that you should be able to provide very detailed answers to before you head down the acquisition path:
- What are your key strengths, weaknesses, opportunities and threats) list? In particular, what do you need to have your opportunities come to fruition? Also how do you mitigate against threats to your business?
- Imagine the future of your industry. How will it evolve? How will customer tastes change, how will suppliers adapt to suit those change, what shifts are likely to occur in related industries, what new direct competitors are likely to emerge, how will customer needs otherwise be solved and what impact (if any) is government policy, technology or the environment likely to have?
- To what extent do you and your team have the right experience, skills and attitudes to capitalise on the opportunity? Can this be improved, and what external skill sets might you need to contemplate bringing in?
- How will you make money from the opportunity? How can you best set up this opportunity in a risk averse way, then make money from it, and then continue to capitalise on it or build and maintain entry barriers?
- Looking at the transaction process. How does the customer make decisions, is your service a compelling purchase, how much does it cost to reduce and deliver the service, how much support is required and how easy is it to retain the customer? What additional revenues or annuity streams can be obtained to improve cash flows?
- How would you strengthen your Value Chain and ensure optimal performance from manufacturers, distributors, imports and exporters, wholesalers and retailers?
- What are the strengths and weaknesses of your current competitors, what resources do they control and how could you potential co-opt potential or actual competitors by forming alliances or otherwise collaborating?
- What financial projections do you have? What cash flow issues do you have particularly pertaining to investing in capital or personnel, or customer or supplier payment terms?
- What alternative scenarios could take place as you implement your plan? How would you cope with a best or worse case scenario (e.g. the initiative is more / less successful than anticipated?
- What is your eventual exit strategy?
Uncertainty in overall business sales – volumes increase, but values stable.
BizExchange have publishes their key findings regarding the trends in business sales over the last quarter of 2012. They find that:
1. Net sentiment was a little more negative than last quarter and a significant number remained uncertain about the way the market was heading.
2. The volume of businesses advertised for sale in the December Quarter surged again, setting a new record, while the value of the BizExchange Index has remained steady.
3. The percentage of businesses with EBIT values between 1 and 2 has remained fairly steady from last quarter during which there was a major change from the preceding quarter when PE ratios between 1 and 2 increased from 35% of listings to 48% of listings. Listings with EBIT ratio values less than 2 was 72%, down from 74% last quarter.
4. The December Quarter saw some softening in prices, particularly businesses with turnovers of $500,000 to $1 million and $5 million to $15 million.
For more information http://www.bizexchange.com.au
Link Corporate scores sales successes in IT space.
Our latest successes include:
IT – Hosted Services – Vertical Market
This Software As A Service (SAAS) business specialised in meeting the demanding needs of medical specialists. Their technology solutions were ideal for practices with multiple sites which demanded the convenience of real time data accessibility from several locations.
Additionally they provided their clients with other IT services covering everything from hardware maintenance/upgrades through to consumables.
The business had established a well-equipped and dedicated data centre in NSW ensuring they had the greatest control and therefore could offer the strongest of assurances to its clients.
To complete the IT&T solutions for their clients they developed a tailor-made VOIP system specifically assembled to suit the unusual telephony needs of multisite medical specialist practices.
This business was sold to an international buyer wishing to expand their commercial operations in Australia. The business sold for 105% of the asking price.
Managed IT, Hosted Services + ISP
An IT services business that provided comprehensive IT services and solutions tailored to meet the demanding and changing needs of businesses in the SME category. They had successfully productised their offering but also offered significant flexibility.
Their income was equally derived from Managed IT solutions, Hosted Services (Cloud Computing) and equipment and software sales. They were also an ISP in its own right and had a fledgling reseller operation.
This business was sold to and interstate computer services business wishing to expand their NSW business via acquisition. The business was sold for 30% higher than competitive brokers had estimated its market value.
How Successful M&A Deals split the synergies
Academic research has repeatedly confirmed that about two-thirds of all mergers and acquisitions among public companies destroy value for the acquirer, at least in the short term.
According to Boston Consulting Group, most acquirers seek to create value by capturing cost synergies. But there is more to value creation than simply identifying synergies and executing strategies to realize those synergies. Their article lists several ways to create value including: losing redundant plants or production lines, realizing economies of scale in purchasing, centralizing administrative functions, reducing headcount, or pushing forward other forms of streamlining.
Is Your Business You-Proof?
Whether you’re planning to sell your company sometime soon or sometime in the future; now is the time to ensure that your business isn’t all about you. From the latest Sellability Score* research involving 2300 companies from around the globe, here are two key factors that are linked to the probability of getting an offer for your business when it’s time to sell.
#1: You’re almost twice as likely to get an offer if your business can survive the “hit-by-a-bus” test.
If you were out of action for three months and unable to work, would your business keep running smoothly? The more your staff and customers need you, the less valuable your company will be to a potential acquirer. One good way to start making your business more independent is to begin spending less time at the office. Start by not working evenings or weekends, and don’t reply if employees call. Once they get the picture, the best ones will start making more decisions independently. The shift will also expose your weakest employees, the ones that need training or that need to find another job. As for you, it might come as a shock to find out how much your business has become such an essential part of you; but if you’re going to sell your business one day, you need to look at it as an inanimate economic engine, not as something that defines who you are.
#2: Companies with a management team (as opposed to a sole manager) are getting offers at almost twice the rate.
If you don’t have a management team, hiring a 2iC is a good first move. A second-in-command can help you balance the demands of running your company and advance your targeted exit time.
Here’s a four-step plan for hiring a 2iC, thanks to advice from Silicon-Valley-based Bob Sutton, author of Good Boss, Bad Boss.
1: Identify someone internally. “The research is clear,” says Sutton. “Unless things are totally screwed up, internal candidates have a strong tendency to outperform external leaders.”
2: Give your 2iC prospect(s) a special project, one that allows them to demonstrate their leadership skills to you and the rest of your team. If your candidate or one of your candidates excels, it will be clear to your team why he or she was selected.
3: Communicate your choice. If you pick a 2iC from an internal pool, explain your choice to the rest of your team. At the same time, wrap your arms around those you passed over and make it clear how much you value their contribution.
4: Shift from manager to coach. “The transition from manager to coach is a gradual evolution where the goal is to ask more questions, spend more time listening, and spend less time talking and directing,” says Sutton.
*The Sellability Score is a cloud-based software tool that allows a business owner to assess the “sellability” of their company. The researchers at The Sellability Score analyze the data from 2300 companies in a variety of countries to understand trends in the business market, with a special focus on the liquidity of privately held businesses.