Strategic Sales


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Strategic sales - how to maximise value on exit - by Craig West, CEO & Founder - Succession Plus

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Strategic Sales

  1. 1. FINANCEHow to maximise yourbusiness sale valueIn this first instalment in a series of features, strategicaccountant and business adviser Craig West explainsthe importance of setting up a bankable successionstrategy 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 everysell it and fund their retirement. But while businesses will be able to be sold entrepreneur’s fantasy – a strategic sale tothat may be the plan, very few business successfully. And to maximise the value a buyer who pays more than anyone elseowners 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 thebusiness exits are the result of some kind of their business more attractive than the rest value you have created, allowing them to payfailure – be it divorce, a partnership dispute, of those on the market. But enough of the more than most potential buyers believe thedeath, 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 interm 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 ludicrouslyof the business through and beyond a successful Warren Buffett, “price is what yousuccession 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 allowsuch an issue is that business owners are of business someone to extract far more value from yourtypically so caught up in the many aspects of business than most other buyers (and indeedmanaging 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 theseregulations, rules and laws that govern SME result of some type of transactions – but to ensure theactivity – that they very rarely have enough concept is solid, we can look at some simpletime to dedicate to strategic succession kind of failure.” hypothetical ‘deals’. The value of a businessplanning. 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 marketto 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 theturned 65 years old in 2011 and population issue, but very few that propose a solution. feature to a new, unproven product withstatistics 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 significantly18 years, every year from 2012 through to strategies that will allow you to maximise enhanced (in its November 2011 private2029 will see the number of baby boomer the value of your business – and, even more equity sale for 11.3 times earnings) to abusiness owners consistently growing. This importantly, will outline strategies to extract buyer who could leverage the more thanmeans that the supply of businesses on that value upon exit to successfully fund your one million Australian and New Zealandthe market looking to exit will be constant prosperous retirement. businesses who use MYOB on a regular44 MAY 2012
  2. 2. FINANCEbasis to manage their accounting and and make the value (with leverage) more that were aligned with products from thecompliance 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 makingBizexchange, the average SME is selling for any longer. an aggressive effort to recruit key staff formapproximately 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 afunds 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 implementedstrategic sale, you need to be relentlessly state and focusing on marketing to the correctly, they can yield substantially higherfocused on that outcome. The business buyer’s existing clients; offering preferred sale prices for your business which, at theneeds to be built, managed and driven pricing to customers of the strategic buyer end of the day, is the reason most SMEstowards 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 targetedtowards making your business irresistible toa strategic buyer. Stephen Covey, author of The SevenHabits of Highly Effective People, says his A winning examplesecond habit is “begin with end in mind”. Butmany business owners actually lose sight of of a strategic salethat habit and very quickly end up gettingcaught up in the day to day issues of running In early April, social network behemoththeir 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 yourbusiness is actually worth. Instagram is a mobile sensation that Some other common reasons businesses counts Twitter co-founder Jack Dorseymake strategic acquisitions of other among its backers. In its shortbusinesses 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 focusedon the outcome – do everything you canto make your business more attractive 45