Many partners and directors see the growth of their business as forming part of their retirement plan or superannuation, should they ever decide to sell completely or sell their shares internally, but selling these businesses in a manner that realises their full value is no easy proposition.
Many people reading this may have already received offers to purchase their business, and many will know the relatively unattractive nature of ‘earn out’ based deals, which see the asset change hands over a three-year term deal at multiples that do not come close to acknowledging the blood, sweat and tears that went into the original business.
What is it that creates that extra value that makes all the hard work worthwhile?
Tax minimisation in many SMEs are often at the forefront of the director’s mind as June 30 approaches every year.
Prepayments and expense loading, in an endeavour to skinny down the business’s profits, to ensure that no more than necessary is remitted to the ATO.
At the same time, however, it diminishes the true picture to any potential purchaser who might be running an eye over the financials.
Given that many of the tax minimisation exercises are merely tax deferral, it is often better to be proud of the business’s profitability and actively seek to maximise the reportable number, which in turn demonstrates to a potential purchaser that the revenues are healthy and sustainable.
Broaden the base
When determining the multiple to be applied to a business, there is always more to it than just what the market deems appropriate at the time.
Businesses with a good spread of diverse clients are generally a better investment than those that are reliant on one or two key clients in a specific category.
Actively seeking to grow your business in the areas it might be underweight will present a more attractive proposition to a potential purchaser.
Business owners have always been reliant on good people at the coal face, and maintaining their engagement during the sale process will generally have a huge impact on the successful assignment of the agency agreements to the purchaser.
Business sales often produce the perfect opportunity for the more ambitious people in your company’s ranks to ride off into the sunset with clients you thought were loyal to your company.
Bringing key personnel into the process and incentivising their involvement will generally yield better results, as opposed to them resenting the fact that the boss just got richer.
Structuring the deal
Most sale and purchase agreements will insist on some lock-in contract period for the principal or other key directors.
Be careful that the time frames proposed are realistic and the terms of the employment contract are sustainable.
Being prepared to stay in the business longer will give the purchaser greater comfort.
At the same time, however, business owners need to appreciate that the new purchaser will have their own ideas about how to run what was once your business.
Including clear and workable provisions in the agreement that determine who has control of what during the transition period will have a large impact on the success of the business migration.
The wash up
Selling your business is often dictated by market conditions.
In these more constrained economic times, normally acquisitive groups may not be actively pursuing purchase opportunities. But as soon as market conditions improve, we are again likely to see mergers and acquisitions gather momentum.
Now is the perfect time to be laying the foundation and structuring the business in the areas detailed above for potential sale.
Some positive action today could provide a substantial value enhancement in the medium term, culminating in a better multiple for your business and a greater reward for the years of toil that went into building the business in the first place.
Steven Carulli is a non-executive director of cirrus8, a commercial management software company, and cirrusBooks, an outsource trust accounting firm.