44 MAY 2012

FINANCE

How to maximise your business sale valueIn this first instalment in a series of features, strategic accountant and business adviser Craig West explains the importance of setting up a bankable succession strategy for when you exit your business.

Many business owners are looking

to maximise the value of their

business so that one day they can

sell it and fund their retirement. But while

that may be the plan, very few business

owners successfully achieve that outcome.

In fact, in Australia 55 per cent of

business exits are the result of some kind of

failure – be it divorce, a partnership dispute,

death, illness, bankruptcy, and so on and so

on. While we have many successful long-

term SMEs here in Australia, the statistics

are not encouraging in terms of survival

of the business through and beyond a

succession event.

The main reason that this has become

such an issue is that business owners are

typically so caught up in the many aspects of

managing and running their business – and

ensuring its compliance with the myriad of

regulations, rules and laws that govern SME

activity – that they very rarely have enough

time to dedicate to strategic succession

planning. This then has the potential to

jeopardise the very purpose for which they

entered into the business in the first place –

to build it up to sell to fund their retirement.

With the first baby boomers having

turned 65 years old in 2011 and population

statistics showing the birth rate of baby

boomers growing every year for the next

18 years, every year from 2012 through to

2029 will see the number of baby boomer

business owners consistently growing. This

means that the supply of businesses on

the market looking to exit will be constant

throughout this period, and therefore a

buyers’ market exists.

Only well prepared and structured

businesses will be able to be sold

successfully. And to maximise the value

of their business on exit, business owners

need to look for a strategy which will make

their business more attractive than the rest

of those on the market. But enough of the

doom and gloom.

There are countless articles around that

highlight the succession and exit planning

issue, but very few that propose a solution.

This series of features will bring you insight

into the five most important succession

strategies that will allow you to maximise

the value of your business – and, even more

importantly, will outline strategies to extract

that value upon exit to successfully fund your

prosperous retirement.

Every entrepreneur’s fantasyThis first instalment will focus on every

entrepreneur’s fantasy – a strategic sale to

a buyer who pays more than anyone else

because they absolutely have to have your

business. This buyer can then leverage the

value you have created, allowing them to pay

more than most potential buyers believe the

business is actually worth.

Why would someone be interested in

paying you more for your business than

it is really worth? To quote the ludicrously

successful Warren Buffett, “price is what you

pay, and value is what you get”. This means

that you need to find a hook that will allow

someone to extract far more value from your

business than most other buyers (and indeed

yourself) are able to extract.

There are many examples of these

type of transactions – but to ensure the

concept is solid, we can look at some simple

hypothetical ‘deals’. The value of a business

who designs voice recognition software,

such as that used in Siri in the iPhone 4S,

is far higher for Apple, which has the market

position to leverage that technology, than

for a company who is hoping to add the

feature to a new, unproven product with

a limited market.

The value of MYOB was significantly

enhanced (in its November 2011 private

equity sale for 11.3 times earnings) to a

buyer who could leverage the more than

one million Australian and New Zealand

businesses who use MYOB on a regular

“55% of business exits are the

result of some kind of failure.”

45

FINANCE

basis to manage their accounting and

compliance needs.

Given that right now, according to

Bizexchange, the average SME is selling for

approximately two times its earnings, these

strategic exits can add substantial retirement

funds to your account.

In order to prepare for and execute a

strategic sale, you need to be relentlessly

focused on that outcome. The business

needs to be built, managed and driven

towards a carefully identified buyer who

will pay you more when you decide to sell.

Your every decision needs to be targeted

towards making your business irresistible to

a strategic buyer.

Stephen Covey, author of The Seven

Habits of Highly Effective People, says his

second habit is “begin with end in mind”. But

many business owners actually lose sight of

that habit and very quickly end up getting

caught up in the day to day issues of running

their business. Unfortunately, this is not

the sort of thing that will attract a strategic

buyer – and it definitely isn’t the sort of thing

that will entice them to pay more than your

business is actually worth.

Some other common reasons businesses

make strategic acquisitions of other

businesses are:

• To expand geographically into a new area.

(Just Water (NZ) acquiring Clearwater

Filter Systems (Aust)).

• To add your product to their existing

loyal client base. (Facebook’s recently

purchase of Instagram (see right).

• To purchase a client base to allow sale of

other products (MYOB purchase).

• To remove a competitor from the

marketplace (Commonwealth Bank’s

purchase of Bankwest).

• To leverage an existing business through

market branding and position (Yahoo7’s

acquisition of Spreets – for $40 million

based on less than 12 months trading).

You need to be relentlessly focused

on the outcome – do everything you can

to make your business more attractive

and make the value (with leverage) more

and more obvious. And keep on doing this

until a strategic buyer cannot avoid you

any longer.

Some businesses I have worked with

previously have gone to considerable lengths

to attract a strategic buyer. These lengths

have included opening an office in another

state and focusing on marketing to the

buyer’s existing clients; offering preferred

pricing to customers of the strategic buyer

who use certain products from that company

that were aligned with products from the

seller’s company; focusing PR efforts on

product announcements; and even making

an aggressive effort to recruit key staff form

the potential buyer!

A word of warning though – this is not a

quick fix and these sales typically take a lot

of preparation and work. But if implemented

correctly, they can yield substantially higher

sale prices for your business which, at the

end of the day, is the reason most SMEs

exist in the first place.

a winning example of a strategic saleIn early April, social network behemoth Facebook paid a reported $US1 billion, in a combination of cash and shares, for popular photo-sharing app Instagram.

Instagram is a mobile sensation that counts Twitter co-founder Jack Dorsey among its backers. In its short existence to date, it has been downloaded by more than 30 million people. The US$1 billion price is the highest paid for a profitless start-up since Google bought YouTube for $US1.65 billion in 2006.

Given that Instagram took a mere eight weeks to build and launch, and the fact that it was profitless and only two years old when Mark Zuckerberg and co acquired it, the massive price tag seems incalculable to the untrained eye.

But don’t you just wish you were on the receiving end of that deal, as were Instagram founders Kevin Systrom and Mike Krieger? And this is exactly the sort of thing we’re talking about here.