Is 2013 the year to reap your reward?
Sue Prestney's February Article
For many business owners this new year will be the one where they realise the value of a lifetime’s work – the sale of their business.
The wave of baby boomer exits which we have expected for so long now appears to be actually happening. It seems that the GFC held the wave back because of lack of liquidity and low risk appetite of potential buyers but now the buyers are back in the market – at least for good businesses, such as those in niche markets and growth industries with proprietary intellectual property and strong management.
Some of the business owners planning on a 2013 sale will finish the year satisfied that they have done justice to their efforts and the sacrifices made in building the business; others will look back on 2013 as a year of disappointment, of missed opportunity where the value they realised from sale of the business was less than expected.
All of us have seen transactions conducted brilliantly and badly. In considering what makes a transaction successful for the seller I have come up with a few factors that need to be addressed early in the process.
- Use the best advisors suitable for your business. Clearly you don’t use an investment bank for a milk bar but I have seen owners of substantial businesses use low cost advisors which obviously contributed to a poor outcome. This is not the time economise – this is when you need experienced experts who understand your business and your industry and who have the right networks to reach the likely buyers. You need people who are great negotiators, who can create competitive tension and know how far they can push the buyers. These are skills worth paying for. By all means shop around for advisors but going with lowest fees may just result in you getting the lowest price.
- Allow enough time and prepare well. The quality of the information memorandum is critical to attracting the right buyers. Make sure the words articulate the unique selling proposition, the soundness of the business fundamentals, the competence and strategic focus of management and the potential for strategic buyers. Make sure there are pictures, graphs and market analysis. Make sure the numbers support the words. Use your accountant – this person understands both your historic numbers and the forecasts. It is critical that these have integrity and support the value you are placing on the business. Take the time to work through ‘normalisations’ with your accountant to ensure they are reasonable and supportable by external assessments. It is ironic that business owners generally see themselves as vital to the success of their business until the time comes to sell it, at which point they suddenly become totally dispensable and their entire remuneration package is added to profit in the normalisation process with no allowance for the cost of someone else to take over their duties.
- Be prepared for due diligence. While a formal vendor due diligence process may be overkill for SMEs, an informal due diligence process may ensure that potential shortcomings are identified early enough to be rectified before the purchaser due diligence commences. Due diligence checklists are readily available and working through these prior to going to market is a good way of making sure you are sale ready.
- Remember that purchasers conduct due diligence not only to give themselves comfort but to find issues that justify paying you less, so identify and deal with any deficiencies before the purchasers become involved.
- By making sure your data room (whether virtual or actual) is fully populated, in accordance with the due diligence checklist, you show potential purchasers that the business is well organised, has met its regulatory responsibilities and the information contained in the information memorandum is supportable. Make sure the question-and-answer process is co-ordinated and the people who are designated to answer the legal, financial and tax questions are competent. Too often you see businesses using internal staff to answer technical questions, particularly about tax, when they don’t understand the implications. This can present the business in a bad light and often results in a more costly due diligence process as buyers need to ask follow- up questions or simply get the wrong impression. This is the time to use your external advisors who are experienced in dealing with the due diligence process, who know your business and have the skill to deal with technical questions.
- Understand what you are selling and decide this well before you go to market. It is amazing how many business owners start by thinking they are selling the business but find they are actually selling the company (and vice versa). There can be significantly different commercial and tax outcomes from the structure of the sale and it is not a good look to change your mind part way through the sale process. This can flag to the buyers that this rethought structure is important to you and may be able to be traded off against something else – such as price. Have the discussion with your accountant well before you go to market. If you are anticipating having access to the small business capital gains tax concessions you need to spend the money for your accountant to work through the labyrinth of the provisions to make sure you get over all the hurdles – sometimes deficiencies can be rectified but it is too late once the business has been sold.
If you are a business owner looking to sell in 2013, start work early, pay to get the best people, be prepared and be realistic. You only get one decent shot at this – don’t be one who looks back at the end of the year with disappointment.
Sue Prestney | EXECUTIVE CHAIRMAN MGI AUSTRALASIA
[email protected]
February 2013
Article written by Sue Prestney for 'Charter', the magazine of the Institute of Chartered Accountants in Australia
Sue Prestney is a Senior Partner with MGI Melbourne and current Chairman of MGI Australasia.
Article reprinted with the permission of the Institute of Chartered Accountants in Australia, www.icaa.com.au