Maximise the Value of Your Business

Craig WestB. Bus (Mgmt.), M. Bus (Acct/Finance), M. Tax Law, CPA, CEPA

Did you know?

The average age of a senior entrepreneur in 2016 is 57 (up from 55 in 2010)

( ABS – 2015 )

76 % of business owners plan to transition over the next 10 years.

66 % do not have a formal succession plan in place.

80 % of businesses put on the market do not sell.

12 months after selling - 3 out of 4 business owners surveyed “profoundly regretted their decision.

( State of owner readiness survey 2016 – EPI )

Source: 2016 State of Owner Readiness Survey

Internally (family succession)

22%

Externally (3rd party)12%

Not sure50%

Other16%

What best describes your company's transition plan?

76%Are not familiar with all the exit options that are

available

50%Have done no planning

at all

Business Planning

18%Have had a

formal valuation in the last 2 years

56%Feel they have a good idea of what their business is

worth

How prepared are business owners generally?

Business Valuation

BUT

Source: 2016 State of Owner Readiness Survey

Baby Boomers – the 18 year wave

(Australian Bureau of Statistics, 2014)

Since 2008, half of

business owners over

50 have delayed their retirements

due to the GFC.

of business owners have not prepared adequate funds for retirement.(Up from 31% in 2010)

(HSBC Future of Retirement Report 2015)

(Based on a male turning 60, female would be 29.1 more years)(Intergenerational Report, 2015)

If you turn 60 today, your life expectancy

is now 26.4 more years.

>45%

Why business succession and exit planning?

50% of all business exits are not voluntary

(2016 State of Owner Readiness Survey)

Causes of exit include:- Death- Disability- Divorce- Distress- Disagreement

5 D’s

“if you want to have a successful enterprise, you clearly define what you’re trying to accomplish…. the extent to which you begin with the end in mind often determines whether or not you are able to create a successful enterprise.”

Stephen Covey (1932-2012)

Well known author Michael Gerber on exit planning – “Having an exit strategy is the ball game for any entrepreneur… the idea is simply to build, grow and sell – whether sell means list, pass on to family, merge, sell to employees or trade sale, there has to be a strategy!”

Business Exit Rates 2014-2015

$0-$50k

$50k-$200k

$200k-$2m

$2m or more

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

19%

13%

7%

4%

Business Exit Rate by Annual Turnover

(Australian Bureau of Statistics 2016)

Buyer Demand for Individual Businesses

(Australian Business Brokers Survey 2014)

Business Succession and Exit Planning

Combining the Business, Financial and Personal goals of business owners to design and implement a strategic exit.

Stage 1: Identify ValueStage 2: Protect ValueStage 3: Maximise ValueStage 4: Extract ValueStage 5: Manage Value

Stage One:Identify Value

STEP 3: Stage One Report- INSIGHTS

STEP 2: Fact FindSTEP 1: Goals and Outcomes

Financial Analysis

Non-Financial Analysis

Benchmarking

Total income per fee earner

Net profit per fee earner

$- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000

$269,858

$88,894

$41,592

$25,595

$384,352

$80,477

$63,969

$50,224

$251,971

$162,002

$48,676

$34,431

Income KPIs

High Turnover FirmsHigh Profit FirmsThis firm

Your Profit Gaps relative to the Most Profitable firms

Allows us to work out…

Your total Profit Gap … as a % of current profit level

Due DiligenceChecklist of all vital information:• Financials, tax returns, BAS.• Legal – licenses, leases , employment

agreements.• Policy & Procedures / Systems.• Intellectual Property – patents,

trademarks.

Analysis presented in the form of a Stage One Insight Report

Stage One Insight Report presented in a face-to-face workshop including:• Strategic Overview• Financial Analysis• Cash Flow Analysis• Sustainable Growth• Credit Assessment• Benchmarking Analysis

• Profit Gap Analysis• Non-Financial Results• Sale Readiness-Attractiveness• Non-Financial KPI Commentary• Valuation Summary

XYZ Pty Ltd XYZ Pty Ltd XYZ Pty Ltd XYZ Pty Ltd XYZ Pty Ltd

as of today after closing the profit gap

after achieving best in class (EBIT

of 12%)

if attractiveness is improved

if sold to a listed company or a strategic exit

Revenue $6,514,811 $6,514,811 $6,514,811 $6,514,811 $6,514,811EBIT $347,591 $570,555 $781,777 $781,777 $781,777Multiple 3.7 3.7 3.7 4.5 5.0

Valuation $1.3M $2.14M $2.93M $3.52M $3.91M

$1,301,756 $1,301,756 $1,301,756 $1,301,756 $1,301,756

$840,000$1,630,000

$2,220,000 $2,610,000

$0$500,000

$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000$4,000,000$4,500,000

Valuation as of today Valuation after closingthe profit gap

Valuation afterachieving best in class

(EBIT of 12%)

Valuation ifattractiveness is

improved

Valuation if sold to alisted company or a

strategic exit

Value enhancement Value today

Stage Two:Protect Value

STEP 6: De-RiskingSTEP 5: Unplanned EventsSTEP 4: Financial Planning

• $$ funding gap – Have I got enough to retire ?• How much impact will taxation have on my

retirement ?• Have I got a Self Managed Super Fund ?• How do I want my estate handled ?• What other investments do I have ?

STEP 4: Financial Planning

Structure ReviewASSETS

RISK

•What happens if you get hit by a bus ?

• Certainty of outcome is key:• Shareholders agreements• Buy-sell agreement/s• Funding arrangements• Insurances

STEP 5: Unplanned Events

STEP 6: De-risking

Stage Three:Maximise Value

What do you want from your business in 5-10 years?

Strategy

Income vs Equity

“The proper man understands equity- the small man, profits”

Confucius551 – 479 BC

Maximise ValueJob vs. Business

Can you leave your business for - Days?- Weeks? - Months?

How can you add value to your business?

Adding Value

STEP 10: Systems and ProceduresSTEP 11: Marketing and SalesSTEP 12: Corporate Governance

STEP 10: Systems and Procedures

STEP 11: Marketing and Sales

• Board of directors

• Advisory board

• Independent directors

STEP 12: Corporate Governance

Monthly Reporting Package

March 2016 Dashboard Report

STEP 13: Employee Engagement•PPA Testing

•Open-book Management

• Incentive Plans

Ladder to Equity1. Income

2. Incentive – commission

3. Profit Share - % profits

4. ESOP – Equity

5. Control / Management

A structure to allow employees to think and act like business owners by matching the performance of the business with their ability to build equity.

STEP 14: Peak Performance Trust

Peak Performance Trust to fund:• Profit share based on performance• Profit used only to fund purchase of

business by same key employees• Employee retention• Improved performance and increased

value

STEP 15: Management Succession

Strategy for successful succession

Existing CEO/PartnersGradually reducing involvement

New CEO/PartnersGradually increasing involvement

Systems / Processes

Stage Four:Extract Value

Net proceeds is the important $• CGT – small business concessions

• Structures – who owns assets – before and after

• Other costs - legal, accounting, other fees

STEP 16: Tax Planning

STEP 17: Documentation

Multiples for Businesses Sold between $1 mil and 4 mil

(Australian Business Brokers Survey 2014)

STEP 18: Liquidity Event

Strategic Sales"Price is what you pay Value is what you get "

Warren Buffett

1 + 1 = 3

Strategic Value Drivers

Strategic Valuation Examples

Microsoft to Acquire LinkedIn for $26.2 BillionBy JAY GREENEUpdated June 14, 2016 12:58 a.m. ET

Microsoft Corp. snapped up LinkedIn Corp. for $26.2 billion in the largest acquisition in its history, betting the professional social network can rev up the tech titan’s software offerings despite recent struggles by both companies.

The deal is Chief Executive Satya Nadella’s latest effort to revitalize Microsoft. Mr. Nadella hopes the deal will open new horizons for Microsoft’s Office suite as well as LinkedIn, both of which have saturated their markets, and generally bolster Microsoft’s revenue and competitive position.

Strategic Valuation ExamplesApple acquires start-up Turi for reportedly $200 million By Jake Smith for iGeneration | August 7, 2016

Apple has acquired Seattle-based machine learning and artificial intelligence startup Turi for around $200 million, as it looks to battle Google, Amazon and Facebook in the artificial intelligence space.

The iPhone giant's shift into artificial intelligence was discussed by Tim Cook, CEO of Apple, on the company's earnings call in July."We have been and continue to invest a lot in this," Cook said. "We are high on augmented reality for the long run."

Strategic Valuation Examples

Strategic Valuation Examples

Marriott International and Starwood Hotels shareholders on Friday voted in favor of a deal that will create the world’s largest hotel company. Marriott is paying about $12.4 billion to buy Starwood. Shareholders will receive 0.8 shares of Marriott common stock plus $21.00 in cash.

Starwood, which owns brands including Westin, St. Regis, Sheraton, and Four Points, agreed to be bought by Marriott in November.

IT'S A DEAL: Marriott and Starwood are merging

into the world's largest hotel company

PORTIA CROWEAPR 9, 2016, 1:47 AM

Strategic Valuation Examples

Sale to a Listed Company

ASX P/E Ratio

Source: Pitchbook Q1 2014 for ALL buyouts

Valuation: EBIT Multiples

Historical ASX average 13.73 x

Private companies average 2.5 xThe value gap is called

“private to public arbitrage”

Private to Public Arbitrage

The total value of transactions increased 35% over the previous year to US$736 billion.

8.8 * earnings before interest and taxes (EBIT) average

Offshore Buyers

To achieve a higher sale price, it’s much smarter to focus on HOW to sell and WHO to sell to, rather than trying to increase profit.

Stage Five:Manage Value

• Last $$ you will ever earn !

LIFE AFTER BUSINESS ?

STEP 19: Ongoing Investment Planning

• Now a different problem

• Illness, divorce, children

STEP 20: Asset Protection

• Update wills• Enduring power of attorney• Philanthropy – charitable foundations

STEP 21: Estate Planning

Case Studies

Real EstateReal estate office in NSWCombined commercial office and residential sales: Central Coast

3 ownersNot in a rush to exitBusiness Value approx. $2.4 m14 employees

Outcomes• Implemented Peak Performance Trust (Engaged and

motivated 5 key staff with equity plan)• Reduced risk – staff retention• Asset protection & risk management - Insured for

unplanned events• Tax and CGT advice• Wealth outside business structure (transfer premises

into SMSF)• ESOP of the year award – 2010.

Valuation Services

Australian-based valuer of plant and equipment.Family owned business – owner looking to retire.Sale of business to strategic buyer – AON – on

revenue multiple - with upside ( 12.5% uplift in final price paid ).

Environmental ConsultingStrategic advisoryCorporate governanceEmployee Share Ownership Plan (ESOP)Management succession

What Next?Further information on our website:

www.successionplus.com.au

Arrange a free 90 minute review

Craig West1300 665 473

cwest@successionplus.com.au

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