Set for sale

It’s coming. The rush of business sales that has been predicted for decades as the baby boomers sell out now looks like it will gather pace, and the economy recovers and mergers and acquisition activity fires.

The latest Thomson Reuters M&A tables for Australia and New Zealand show that the number of deals announced in the first nine months of this year is more than double what had been completed in the corresponding period last year. At the same time, the latest Australian Industry Group/Deloitte Private CEO survey showed that more businesses are now looking at alliances and mergers.

Anyone selling a business needs two things: a detailed business plan and the ability to answer key questions about their business.

But it’s not just entrepreneurs actively looking for a sale that should be “sale ready”.

What’s the market penetration rate? Who are your customers? Is it a growth market? What are the demographics? What are the growth areas? What’s the cost per customer acquired? Who are the members of your team? Who are the most critical ones to be retained post-purchase? How unique are your products and services? Who are your main competitors? How do you make what you sell? How unique is that system? What’s the back office system for things like billing and payments like?

If you are not hunting for acquisitions, you could well be being hunted yourself. And if a juicy offer suddenly lands on the table, is pays to be prepared. Selling a business cannot be done overnight and takes months of planning, preparation and documentation.

And remember, the worst time to sell a business is when you absolutely have to sell. Buyers will know when you are desperate and will exploit it to gain leverage and the lowest possible price in that transaction. Unfortunately, that might have become a common scenario in the wash up from the global financial crisis.

Robert Hurst, director of business brokers Hurst Partners, says it has hit prices. He says he has lately sold some businesses for as little as one third of the asking price.

“If you can get three quarters of the original asking price, you are doing pretty well,” Hurst says.

“One of the first things you need to do is to have a look at your figures and make sure they are clean. What we are finding at this point in time is that a lot of businesses we look at have taken a fairly big hit through the GFC period and the trend is down. It’s not a good look and it’s affecting prices.”

“Quite a few potential sellers are saying it’s affecting my price, I might as well hang in there and trade on.”

Having the basics down is a must. Making sure the reporting is in order, getting the customer database in good shape, documenting processes and paying off debts and tax liabilities ahead of the sale are crucial. But then, as Hurst says, you need to do that anyway. “Otherwise you would be struggling to do business.”

Hurst says the first thing the business needs to do is determine how it has changed and how that will affect the price. Any debts and hire purchase liabilities come out of the sale price.

“The sale price will incorporate the business, the plant and equipment, goodwill if any and the stock. When the purchaser is looking at the business, they are looking at their return on investment and that includes working capital. The purchaser is not interested in giving you a price to cover your problems. They are only interested in looking at their return on investment.”

He says entrepreneurs should also plan to stay around after they have sold the business. Purchasers might still need their input and experience from running the company, at least in the first few months. “A lot of owners think they can hand over the keys and collect the cheque and take off for a round the world trip and disappear for six months to a year,” he says. “That wouldn’t go down too well with the purchaser.”

“It depends on the nature of the business but with most, you need to be around for at least a month. With some it could be six months, with some it could be a year.”

Entrepreneurs who have sold businesses told Smart Company that you need to be prepared for rigorous questioning from purchasers wanting to know they are getting a good deal and not picking up a dog. The most essential part, they say, is to have a detailed business plan. All part of the process for handling takeovers.

Connect Furniture director Joe Bruzzaniti sold his online learning business, Learning Seat, to News Corporation four years ago. He says detailed questions were served up during the due diligence process.

“They wanted to know what our markets were, who our customers were, our revenue base and the spread of revenue across different customers. They wanted to understand where our current business was at, where our revenue streams were coming from and who our competitors were,” he says.

“That’s all the usual stuff you would expect when you are evaluating any business.”

The paper work had to be done. “We had to pull together documentation which itemised a few things. It ended up being reams and reams of the stuff. In our case it was five or six very large folders of documentation,” Bruzzaniti says.

“They needed to see our business plan and where we had come from. They wanted us to put that across.”

Because he did not have experience selling companies, Bruzzaniti brought in people to help manage the sale. The first step, he said, was to do the homework on the purchaser.

“The first thing we wanted was to make sure it went to a good home,” he says. “The first step is to make sure there is a good match between the buyer and seller and then the next step is all about due diligence which is the state of the business, where you are headed, what your risks are and your intellectual property. You need to identify this stuff in your business plan. That’s the core of it and all the questions are just drilling deeper and deeper into that business plan.”

Silvio Salom, director of Adacel Technologies, is a veteran at selling businesses. He has sold two of his own and with his expertise; he has been brought in to sell 20 belonging to other people.

Salom says focusing on purchasers can be even more important than having a business plan. If acquirers want it bad enough, they will pay more.

“It’s not that you shouldn’t have a business plan but when you are selling the business, you need to look at who the key buyers are,” Salom says. “You need to understand what their motivators are. If you can get them from a strategic angle, you can get better multiples. Otherwise, it just comes down to industry standard multiples.”

“I had a small business that had a turnover of $2 million but had assets that were of interest to the buyer. When it was positioned that way, we had multiples that were far beyond anything that was in that sector.”

The key, he says, is to position the business strategically to the purchaser. “When you look at how you are pitching a business plan, you might push it to certain things that are their drivers.”

The purchaser for example might be more interested in how many customers there are and they might see that as more important than the earnings. The focus therefore switches to the customer.

“You would look at how you position that for the buyer and then you would write something that will explain very quickly the opportunities for the business.”

The business plan is critical for detailing customers, finances and growth opportunities. The documentation for intellectual property including contracts need to be in place.

“You make sure it’s really clean and easy for them to do a due diligence. You pull all your documents together and structure it in a format so when they come in and do a due diligence, they do it quickly and they are impressed with how you have everything organised.”

Kate Julius, a partner at PricewaterhouseCoopers’ private clients’ team, says entrepreneurs planning to sell need to ensure the business stands out from their competitors. It is also critical to be right on top of all the information that potential acquirers will be asking for.

You also need a strategic plan that shows what your customers love about you and how you are different from your competitors. Having everything documented will instil confidence in the purchaser.

“If you don’t have your finger on the pulse, you are not going to be able to act appropriately and that may be an issue in undermining the value of the business,” Julius says. “I can’t stress enough how important preparation is in that whole aspect of selling the business.”

“It’s like selling a house. When you sell your house, you dress it up, you paint the fence and you make sure the door doesn’t squeak. That’s very important to apply to the business.”

“It means preparing all aspects. Some of that will be around the quality of financial information. Some will be around making sure that your employees are on board and making sure about the remuneration. It could perhaps mean formalising contracts with key customers. Purchasers want to understand there is certainty around employees and certainty around customers.”

She says in many cases, selling the business allows the entrepreneur to address issues that have been on their to-do list for some time.

“From a valuation context, there are three things that drive value: cash, growth opportunities and risk. Those are the three levers for anyone determining what the value of their business is.”

Preparation gives the entrepreneur more control.

She says there has been a strong market over the last six months for quality high growth business but she concedes price expectations – where the seller is expecting to get more – have been an issue.

“If a vendor is not prepared, it’s unlikely they will achieve those expectations,” she says.