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Published 31 May 2012 00:08, Updated 31 May 2012 04:15
Stand out: Prepare well ahead of time for the opportunity to selll your business Steve Hynes
For business owners that want to sell their businesses, the first hurdle is being noticed by potential buyers.
The smartest entrepreneurs know the landscape and have an idea of who might be a logical acquirer. For example, the director of online appliances and electronics retailer Eljo, Jonathon Green, expects that other pure-play online retailers, as well as offline shops and clearance houses, may be candidates to buy his business.
But knowing who they are doesn’t mean they know who you are and Clayton Utz mergers and acquisitions partner Nick Miller says just hobnobbing with other chief executives and business owners might not be enough. “It’s rarely the CEOs who are dredging up these [acquisition] ideas, it’s the business development teams,” he says.
Outside of their competitors’ businesses, Miller says it would be more effective to get noticed by accountants and lawyers, who often put forward potential acquisitions to their clients because they can profit from the transactions.
Miller says business owners should not be afraid to just call the advisers and introduce themselves but crucially these introductions need to occur some time from needing to sell. “Say, ‘I’m not looking to sell now but just wanted to introduce myself’,” he advises.
He says a phone call after meeting at an event is probably more useful. “The more warmed up it is and less of a cold call the better. But if it’s a business that has a compelling position in the market and some growth prospects, why not?”
Miller’s networking point is crucial and he challenges businesses to meet as many of their likely acquirers as possible, especially globally. “They need to have an understanding of their likely competitors,” he says. “The best way to do that is to attend industry conferences, not so much just in Australia as overseas. Overseas buyers actually pay slightly higher prices than Australian buyers do.”
It’s basic advice but Miller says an informative website is absolutely imperative to catch corporate advisers looking for opportunities for their clients.
Once a business is noticed, however, there are more things it needs to do.
“The only way you will retain that attraction is if you’ve really prepared well ahead of time,” he says.
Many of the entrepreneurs BRW spoke with said they saw their business as a takeover target. For both the Fast 100 and the Fast Starters, the statistics are similar. About one-third of businesses were started with an exit in mind and about half of those see being acquired by another company in their industry as a likely scenario.
But are they now building up their revenue and profits and will focus on making the business sale-ready later.
A director of leadership consultancy Bendelta, Natalie Archer, says that although she does not have an exit time frame in mind, “we recognise that a good business is a saleable one and we have actively focused on strengthening the balance sheet through building up our [intellectual property] and technology solutions, to this end”.
However, the pace of deal-making is swift and entrepreneurs need to be prepared.
“If you have the offer from heaven fall on your lap and you’re not prepared ... then you’re going to really struggle,” Miller says. “You’ll just see the value of your business evaporate.”
Preparation revolves around shoring up future earnings and operations. Getting substantial customers on solid contracts will remove the risk of earnings dissipating once a business is sold. “We have been able to woo medium- to long-term clients,” on three- to five-year contracts, Bendelta’s Archer says. “That creates a level of continuity and ongoing revenue in the business.”
This customer due diligence especially applies to “handshake” contracts, Hall & Wilcox partner Bruce McFarlane says. “In a lot of industries people will say, ‘That’s not the way we do things’ but in the eyes of a buyer, if a vendor is going to exit, it is the key,” he says.
Contractual arrangements for staff should not be forgotten, he adds. “Some of your key staff may be part of your business succession plan and if that’s the case, ensuring that their contracts are appropriate [is important].”
The general manager of online retailer TopBuy, Peter Xie, says he will soon consider an employee share structure “to ensure we retain the good staff”, in an effort to make his company a takeover target in future.
Similarly, McFarlane reminds entrepreneurs of the importance of succession planning. “There’s a lot of intellectual capital in any business that walks out the door when the founder walks about he door,” he says. “Even if a business is purchased by a competitor who understands the industry, they may not understand the client or staff relationships or the processes – the herbs and spices in IP [intellectual property].”
In some cases, a sale will not be a complete exit for a company founder and if they agree to stay on, it can play to their advantage, especially if they agree to an earn-out provision that promises further growth. “You’re saying that there’s growth potential in my business,” McFarlane says. “If you’re prepared to stay and drive the business plan and share some of the risk of it not being fulfilled, it’s an easier sell to a buyer. The flip side is, if you’re an entrepreneur and you now have another master to report to, some people find that very difficult.”
McFarlane adds that when a competitor is looking to purchase, it is often so they can find synergies and cost savings. “So you need to ensure your systems and processes are well documented so they can obtain value in the savings,” he says.
Kevin Moore bought into The Marketing Department and built its revenue from $8 million to $23 million over eight years before it was sold to international marketing firm Crossmark in 2008. He says selling a business is a six-year process. There should be at least three years before a sale, where “you start to act and think like a public company” and a further three years where the key management are willing to stay on and drive the business in the new parent company.
“For most private companies, [competitors] are looking to buy them all the time,” Moore says. “The most important thing is to be match fit.”