A builder is working on his own house when a passer-by stops and asks whether the house is for sale. The builder replied: “It’s always for sale, for the right price”.
It’s a popular anecdote because the lesson behind it holds true for most businesses.
Too often we see business owners so deeply embedded in working in their business that they forget to step back and look at it objectively and as an asset. One of the best ways to do that is to go through the process of getting a business sale-ready.
When should you start creating your sale-ready plan?
It typically takes 2-3 years for a business to execute its sale-ready strategy, so it’s ideal to start the process well before you plan to sell, retire or transfer ownership.
Ultimately, a business will only be worth what someone or the market is willing to pay for it – not what you expect, want or need. Value is maximised when buyer appetite is strong, the risks are low and attractiveness is high.
The value of getting sale-ready
The process of getting a business sale-ready can help shape business growth and exit strategies, drive good business practices and position its owners to be able to capture expansion or exit opportunities as they arise.
By identifying and implementing the right value drivers, business owners can make the business saleable and add value to the asset. Importantly, this approach also makes the exit process much more pleasant for the owners, as they can follow a clear plan and work closely with advisors who have their interests at heart.
For example, we started helping the owners of a transport logistics and freight business improve the value of their business by getting sale-ready just over three years ago. Over the past two years, they implemented our recommendations and made the business saleable and improved its value by roughly 30%.
The value drivers for potential buyers
To understand what potential buyers are looking for, it’s important to understand what they don’t want. Assuming we are talking about a viable business, the biggest red flag will be the risk of key dependencies. Most buyers are looking for diversity with customers, products or services, management, suppliers and locations. We tell clients if they want to really test their key dependency risks, they should go on holidays for six months and see how things are when they get back.
Buyers and their lenders ultimately want to see a de-risked, ‘attractive’ business – one with sound accounts and financial records, up-to-date contracts, disentangled personal finances, strong market position and potential, quality assets, and smooth, well-organised operations.
The value drivers will change depending on the nature of the buyer. For example, a competitor won’t value an investment in operational efficiencies as they are likely to use their own back-end processes. However, high net worth individuals, private equity firms and lenders will look for a turnkey ‘corporatised’ business
What’s involved in getting sale-ready
We take a three-phase approach to getting businesses sales-ready. The first thing we do is a strategic review of the business, which extends the conversation beyond the 12 month budget cycle to inform a multi-year financial forecast model. We find that a financial forecast model is the best way to distil and articulate the business strategy in terms of financial outcomes and value.
In itself, this three-way financial forecast model is an asset the business can use for strategic planning as it supports insightful analysis and better visibility of future cash flows, balance sheet and profit and loss business performance. It can be used to support CAPEX investment and financing activities.
We also use the forecast financial model to prepare a pricing paper. A pricing paper provides a high-level view on where we see business value may sit. We use a discounted cash flow (using the financial model outputs) and comparable market information to form this view. In this way, we link business strategy, the financial model and business value together. This coherent linkage also helps with a more sensible negotiation and discussion with buyers, compared to just arguing about headline numbers alone.
At this stage in the process, we also undertake a SWOT or gap analysis, identify the key value drivers for the business and help create a 6-12 month plan to implement the changes. Again, we can update the financial forecast model and pricing paper to show the impact on value of sale-readiness improvements.
For businesses considering a management buy-out / buy-in, this independent verification of the business’s potential value, strategy and commercial prospects can overcome many negotiation barriers.
Once the business is primed for sale, we prepare a strategic buyers list. We spend a large part of our time talking to potential buyers, including competitive businesses, private equity firms and larger organisations looking for bolt-on diversification options. These networks help us connect vendors to potential buyers once their businesses are ready for sale.
Moore Australia’s Corporate Finance teams have extensive experience in advising on sale-readiness. To arrange a meeting to discuss how getting sale-ready can add value to your business, contact a member of our team.