Exit Strategy: the best outcomesfor business owners come throughcareful planning and preparation.
The process begins well in advanceof putting up a “for sale” sign. Inthis guide to selling a business,Grant Thornton outline the keyfactors for business owners toconsider. Contents 1 Timing and the market 2 What is the business worth? 3 Improving business value 4 Selling the business 5 Concluding the sale
Timing and the marketOver the last decade, capital markets Private equity raised by fiscal yeararound the world became awashwith funds. These funds primarily Source: Thomson Financial & Australian Private Equity & Venture Capital Association Limited Surveyaccumulated through a decade of Fiscal Year Ended June 30, 2006economic growth and compulsorysuperannuation savings. Low interest 1999 Venture capital raisedrates and low yielding traditional 2000 Private equity raisedinvestments have driven fund managers 2001to seek alternative investment strategies.Capital Association Limited Survey 2002Fiscal Year Ended June 30, 2006. 2003 Whether through expansion 2004strategies of larger corporates, 2005consolidation strategies of private equity 2006managers or perhaps purely directinvestment, this money is finding a 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500home in middle market privately ownedbusinesses. Never before has such opportunityexisted for business owners to acceleratetheir succession planning and considerthe future of their equity. Exit Strategy 1
What is the business worth?This is a question close to the hearts of every businessowner. Understanding the components of value can steerthe owner toward a “value improvement strategy” thatresults in a substantially better exit outcome.Perhaps the single biggest determinant Whilst “profit” and “risk” can seeof the value of a business is its current opposing accountants argue aboutand recent profit history. It represents theoretical value indefinitely, thethe reward to the business owner, and of ultimate determinant of value is thecourse, the future business owner. strategic position of a buyer. The second major determinant of thevalue of a business is “future risk”. It is Beauty is in the eye of the beholder.an assessment of the probability that theprofit of the business will be maintained Factors such as economies of scale,or grow. Factors to be considered in cross fertilisation of products andassessing this risk include: markets, market domination or even fast• the dependency of the business on tracking of growth, can see particular the business owner buyers pay more for acquisitions than an• sustainability of competitive accountant’s valuation. advantage• intellectual property• growth and profit trends• business disciplines and practices• culture and professionalism• the market in which the business operates.2 Exit Strategy
Improving business valueMost people will paint the Business owners should undertake Attention must be focussed on those similar steps when preparing to sell their attributes of “future risk” describedhouse, weed the garden and business. before. For example, what must befix the broken gutter before So many businesses view their done to reduce the perception that thethey put their house up businesses as their “superannuation business will no longer prosper without nest egg”. It represents a one-off the business owner? Hence, what arefor sale. opportunity to convert a lifetime of the implications for the management effort into wealth. All too often, the structure, policies and procedures, majority of the family’s wealth is tied up reporting, ongoing innovation and in the business, invariably all at risk and creativity and ultimately, the drive highly dependent on a successful exit behind the business? outcome… that is of course, after tax, By attending to factors such as these, after debt repayment and after vendor the business becomes more mature and warranty provisions. will usually be in a better position to Clearly a strategy must be set to grow and prosper without the business maximise value. The aim is to get the owner’s daily influence. business “investment ready”. Properly executed, value grows exponentially. It can take up to five years to become “investment ready” so it is important to start preparing early. Exit Strategy 3
Selling the businessAn Information An Information Memorandum is a Throughout the process, a confidentiality document which highlights the key strategy is usually critical.Memorandum is value drivers in the business and presents Business owners might be wise tothe backbone of a the opportunities and challenges in a leave the negotiation, documentation,professionally structured positive but not misleading manner. due diligence and settlement to the Importantly, it must be structured professionals. There would be nothingexit methodology. such that prospective purchasers can worse than frightening a prospective quickly and easily access the strategic buyer away at the last minute when significance of the opportunity and be their due diligence reveals falling profits able to propose an indicative offer for attributable to a distracted business the business. owner. It must be capable of withstanding Finally, it is the after-tax outcome a due diligence process without any which matters most. material concerns. Armed with an Information The whole selling process is a Memorandum, an investment ready procedural methodology structured to business owner can commence the next attract the right buyer who is prepared phase of selling… identification of a to pay a good price for a business buyer. which clearly demonstrates strategic Not surprisingly, in around 60% advantage through acquisition. of cases, business owners already know their future buyer. It may be a competitor, a supplier or even a client. A list of known suitors is easily assembled. Attracting the other 40% requires a sales program using mass marketing and multimedia outlets.4 Exit Strategy
Concluding the saleOnce the money is in For most of their lives, business owners How can investments be structured have risked most of their wealth to be in to provide good returns but mindfulthe bank, most business this once-in-a-lifetime position. They of the risk profile of the family? Howowners become risk averse, know how to run a business, but how can taxation be legally minimised?quite understandably. can they make the transition from a risk How can the estate planning be taker to that of custodian? properly structured to incorporate Sadly, too many business owners get superannuation, insurance, wills and this bit wrong! trusts? How can the owner remain What does this “pot of gold” mentally challenged? represent? It represents the future A comprehensive wealth security, income and lifestyles for the management strategy should bring business owner and their dependents for together all of these components. the term of their lives. It represents the Importantly, like planning for the sale opportunity to pass wealth to the next itself, it should not be left to the last generation and beyond. minute.Grant Thornton design exit strategies for business owners to meet their lifestyle,income, wealth and security objectives. Whether the exit horizon is near or far, thebest exit outcomes require careful planning and preparation. We are here to help.If you want to know more, please contact us...Adelaide Brisbane Melbourne Perth SydneyLevel 1 Ground Floor Level 35, North Tower Level 1 Level 1767 Greenhill Road Grant Thornton House Rialto Towers 10 Kings Park Road 383 Kent StreetWayville SA 5034 King George Square 525 Collins Street West Perth WA 6005 Sydney NSW 2000T 08 8372 6666 102 Adelaide Street Melbourne VIC 3000 T 08 9480 2000 T 02 8297 2400F 08 8372 6677 Brisbane QLD 4000 T 03 8620 6000 F 08 9322 7787 F 02 9299 4445E firstname.lastname@example.org T 07 3222 0200 F 03 8620 6066 E email@example.com E firstname.lastname@example.org F 07 3222 0444 E email@example.com E firstname.lastname@example.org Exit Strategy 5
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