Exiting Your Business - Being Exit Ready

Presentation

Exiting &
Harvesting Ventures

Michael Royal
CEO & Founder
BIR Solutions

P 1300 783 309 E info@bir.net.au W www.bir.net.au
All information provided is subject to copyright

Things to Contemplate for
Today’s Presentation

• Why do you want to start up a business?
• What are the most important issues in starting
up a business?
• What do you want to know more about today?
• What would make a difference to the
development of your exit strategy?
• When is a good time to a) consider your exit
strategy and b) build your exit strategy?


Table of Contents

• BIR Solutions
• Business Realities
• Buyers & Sellers
• Valuations
• Selling & Exit Issues
• Pre-Sale Process


BIR Solutions
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Imagine great business solutions? We do!
When you are
in the black

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Solvency & Viability – the line in the sand
When you are
in the red

BIR Solvency Solutions
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Saving businesses, saving stakeholders
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Our Solutions
We assist with your planned exit strategy
BIR
Accountant & Model

strategic buyer
Business Broker
Model

Finding a
for the purchaser
Adding value

$
Typical EBIT
Multiplier

$
$
Now 12 to 24 mths

Business Realities:
The Business Life Cycle Model
= Decline = Recovery

Maturity
Decline
?
Size

?
Start up ?
Growth
?
?
?
Time


Business Realities

• Business failure is high in the first 5 years of a business’
life.
• Most successful businesses are not ‘sale ready’.
• Buyers get to look at lots of businesses and learn by trial
and error during the acquisition process – Sellers only
sell once each time.
• Most owners only sell a business once or at most twice
in their lifetime. They are chronically under-prepared for
the sale process and at best, learn on the job. They are
experts at working ‘in their business’ and perhaps
working ‘on their business’
• BUT NOT ‘selling their business’!


Business Realities

• A business sale is the single largest transaction
most business owners will enter into. It has the
capacity to make them a lot of money – or they
can leave it on the table for the buyer.
• More business owners will be selling over the
next 10 years. Supply may outstrip demand =
Prices for ‘average’ businesses will decrease.
• Most SME businesses sell for a multiple of
between 3 to 5 times earnings – if that is higher
than the Net Assets being acquired.


Business Realities
*** NEWSFLASH ***
• SME business prices have hit a new low as baby
boomers looking to retire are selling into a buyers
market.
• Growth in volume of sales has slowed (but still
growing).
• A continuing decline in values & multiples of EBIT
over the past 2 years.
• Many owners choosing to ‘liquidate’ rather than sell
as a going concern
Source Bizexchange Index www.bizexchange.com.au

• CONCLUSION – TIMING IS EVERYTHING BUT
PLANNING CAN HELP

Buyers & Sellers

• Buyers buy based upon what they can make out
of the acquisition on a best/worst case i.e. their
best/worst case future earnings from the assets
being acquired.
• Who is the right buyer? Someone who is:
• Identifiable & reachable.
• Willing & capable of undertaking the acquisition before,
during and after the deal.
• Will regard the deal as a sound business decision
before, during and after the deal.


Buyers & Sellers

• Buyers discount for risk and rarely pay a
premium for unverified potential
• Higher multiples are applicable where:
 Typical risks can be shown to have been removed.
 Potential future growth has been verified preferably
externally.


Buyers & Sellers

• Buyers who have a track record of buying are
likely to have an existing model for acquisitions:
• This is a plus as it makes it easier to identify how and
why a buyer will buy and what they will buy.
• This is a minus as the model can restrict how much the
buyer is willing to pay.


The Seller’s Job

• Identify what the buyer wants to buy (don’t sell them
what they don’t want to buy – sell it elsewhere or hold on
to it).
• Understand how the buyer wants to buy (previous
history).
• Show the buyer what they can make out of the sale on a
best case but likely scenario.
• Reduce or eliminate those risks/issues which impact on
the buyer’s worst case.
• Put forward a logical and persuasive argument as to why
the buyer should share with the seller part of the likely
upside.
• Have a plan for your life after the sale!!!


Selling & Exit Issues
What makes a seller want to sell?
• Opportunistic buyer comes along at a ‘good
price’
• Business/private circumstances change for the
owner
• Owner does not have the desire / ability to grow
& change
• Business requires major internal changes to
survive / grow
• External forces requires a change in the
business to survive / grow
• Business requires new funding to survive / grow

Typical Exit Options

• Trade sale
• Management Buy Out - MBO
• Management Buy In - MBI
• Private Equity / Venture Capital
 Fund
 Individual / Angel Investor

• Initial Public Offering – IPO
• Liquidation & Planned Wind down – Asset sale


Factors to Avoid in Business

• Not being prepared for an offer for your business
• Losing control of your business
 External factors
 Internal factors
 Funding factors


What Buyers Look For

• Trade sales
 Strategic advantages
 Synergies
 Continuation of revenue & containment of costs

• MBO’s & MBI’s
 Profits & cash growth to pay back debt, buy out a VC
 Growth to facilitate an IPO


What Buyers Look For

• Private equity
 Return on investment through profits & growth
 Industry acquisition roll up
 Clear exit strategy 3 to 5 years – IPO / Trade Sale

• IPO
 Return on investment through profits and growth


Key Issues to Exiting Successfully

• Be prepared. If unprepared, preparation for an
unprepared business can take a long time: +
2yrs
• Control the timing of your sale process & exit
• Understand your business
• Understand your likely buyers
• Have 3 or more buyers available to create
competitive tension



• Keep the ‘during sale’ timeline tight to avoid
interest waning – this means being prepared
• Determine if your business is likely to be a
 Financial Sale
 Strategic Sale
 Or a combination


Definitions

• Financial Sale

Where a buyer looks to the business acquisition
to provide future profits in its own right.
• Strategic Sale

Where a buyer seeks to gain a strategic
advantage which it either cannot develop itself
or which it cannot develop itself within a requisite
timeframe.


• Be able to answer the question “Why would I
pay more for this business than a standard
multiple of earnings?”
• Like any sale process you are selling the sizzle,
not the sausage.
• Don’t forget the Buyer’s WIIFM – What’s in it for
me?



• Payment terms
• Payments upfront reduce risk for the seller and so may
be lower price paid
• Payments delayed increase risk for the seller (Will the
payment events happen? How will the payment events
be interpreted?) but reduce risk for the buyer and may
increase the purchase price


Financial Sale

• Key Attributes of successful sales:
• Historical profitability
• Sustainable profitability for the future = sustainable
competitive advantage in the existing business
• Low business risks
• Future growth opportunities for existing business
• Management not being supplied by buyer must be
locked in and motivated to succeed


Financial Sale

• Examples
 Private equity deals
 Most SME deals
 Many Listed company deals

• Types of businesses
 Most business sales
• Valuations – normally 3 to 5 times but perhaps
up to 10 times as per this presentation


Strategic Sale

• Key Attributes of the business:
• Unique attributes not readily available ‘today’
• Attributes are scalable
• Attributes can be amalgamated into another (larger)
business
• Sustainable competitive advantage
• Low business risk
• Management who can unlock potential must be
motivated & retained


Strategic Sale

• Not Necessarily Required:
• Historical profitability
• Existing sustainable business model
• Largeness compared to buyer can be a disadvantage –
disparity in size often holds the key


Strategic Sale

• Examples
 IT Hi Tech R&D Fashion Agricultural science
Telecommunications
• Valuations: can be a huge multiple of current earnings –
often based upon buyers potential earnings rather than
seller’s historical earnings
• Why?
The seller is seeking to share in some of the upside
which will flow through to the buyer from the acquisition
from acquiring the strategic assets


Pre-Sale Process

• Alignment of interests:
 Directors, Senior Management & Shareholders
 Build post-sale scenarios for stakeholders
 Make sure all stakeholders see upside

• Due Diligence
 Select the right Advisory team for your sale – Tax,
Audit, Negotiator
 Minimise risks for the buyer – discounts are made for
poor, incomplete or missing key factors + the costs of
due diligence in achieving the proposed end result


Pre-Sale Process:
Minimising risks for the buyer

• External Factors:
 The impact of Porter’s 5 forces model (Competitors,
Customers, Suppliers, New entrants, Substitutes)
• Internal Factors:
 Values = Leadership & Management
 Asset protection – intellectual, financial & physical
 Asset & Liability management – relationships,
agreements & compliance with agreements
 Systems & processes – incl. internal & external
verification
 Human Capital Retention strategies


Pre-Sale Process:
Minimising risks for the buyer

• Minimising due diligence risks:
 Have a history of audits from a reliable firm
 Have due diligence files ready and fully prepared
 Have risks identified and anti-risk strategies explained

• For each cost ‘sustainably’ removed from the
business, add at least 3 to 5 times its value
• For each risk removed from the business, add to
the multiple being used.


Pre Sale Process:
Strategy

• Understand the buyers:
• Identify likely buyers
• Identify key attributes for these buyers which
 Add a premium to the sale price
 Reduce the final sales price
• Set up non-sale communication with likely buyers
• Implement strategies for adding value
• Benchmark performance
• Process improvements
• Validate future profit potential opportunities


Pre-Sale Process:
Strategy

• Premiums are added for strategic advantages,
‘laid in concrete’ future opportunities
 Trial new opportunities to demonstrate their potential
is real
 Obtain Heads of Agreement subject to current
constraints being overcome (eg lack of capital to
implement)


Case Study #1
Facts
• Manufacturer – food industry – 25 years
• Turnover $30M increasing to $40M
• Margin fluctuates
• Recent history of losses
• Local customers – mainly major retailers
• Imported some key raw materials
• Employees – many with long years of service
• Union site
• Small player in the industry
• Competes with large global companies (local prod’n) &
other small local manufacturers


Case Study #1
Issues Impacting Saleability
• Does it have any competitive advantage or
unique selling proposition?
• Are its global competitors interested?
• What other local competitors might there be?
• Is the industry open for some form of horizontal
roll-up?
• Can it sell to overseas markets?
• Does it have brand(s) recognition?


Case Study #1
• Can it manufacture off shore?
• What is the history of OH&S & EPA?
• What redundancy costs if business is relocated?
• Is Plant & Machinery up to date & efficient?


Case Study #1
• What about debt?
• What about profitability?
• What about cashflow?
• Does it have detailed systems & processes for:
 Manufacturing?
 R&D?
 Market Research?

• Is it a sale of business & assets or a sale of
shares?


Case Study #2
Facts
• Distributor – capital equipment construction – regional
territory (VIC)
• $9M turnover
 New Unit sales – low margins
 2nd Hand Unit sales – reasonable margins
 Service sales – reasonable margins
 Parts sales – high margins
• Has been improving processes
• #3 amongst competitors in Construction Industry
• Australian Distributor is subsidiary of global supplier
• Floor plan finance for stock


Case Study #2

• What are the determinants of future sales?
 Controllable & Uncontrollable (eg economy, building
& construction)
• Is it getting all the service work from all its old
sales?
• What impact do warranties have on the sales
process?
• Is the global supplier good at honouring
warranty obligations (quick, generous)
• Is it located on the right geographic location?


Case Study #2

• Is suitable floor plan finance in place?
• Can a competitor selling competitive products
buy the distributorship?
• If not, who are the logical buyers?


Case Study #3
Facts

• Training business – corporate training programs
for staff.
• Turnover $0.6M
 50% from the Gov’t RTO program
 50% paid 100% by clients

• Profitable
• Owner works 3 days/wk
• All training staff are contract staff.
• Small head office staff.


Case Study #3

• Is turnover too low to attract competitive interest?
• How many clients are repeat Vs new?
• What happens if the Gov’t stops the RTO program?
• Is there a formula driven sales process which has a
known conversion rate?
• Are there add-ons to increase the value of each sale?
• What new products can be added to the sales mix?
• What if the owner wants to start again in the industry?
• What agreements and non-compete clauses are in place
with the key trainers?


Thank you for your time today!

Further Questions?


Appendix 1: Valuations

• Business valuations:
 Asset based
 Multiple of Future Maintainable Earnings (PE)
 Discounted Future Cashflow
 Industry ‘Rules of Thumb’
• All valuation methodologies intuitively take into
account risk and return.
• The greater the perceived risk of the future not
at least reflecting the past, the greater the
discount.



• Unless shown otherwise, all other assets being sold
have an inbuilt risk as to the likelihood of the asset
generating a return equivalent to its historical return.
• When an asset has an extraordinarily high value multiple
of current earnings, there is an unstated implication that
future earnings will be far higher than past earnings.



• Valuations of future performance factor in:
 Reliability of historical revenue streams being
repeated year on year
 Likelihood of future revenue streams being increased
 Reliability of underlying costs being maintained at
current levels for current revenues
 Likelihood of additional costs being required to
service higher future revenue levels
• The greater the certainty of these, the lower the
risk to the buyer and the higher the price willing
to be paid



• High PE’s - think Amazon, Google etc in the last
10 years and their premium over a normal PE.
• There is an expectation that future earnings will
increase sufficiently so that a realistic PE based
upon future earnings would result in the current
market price being ‘fair’ to the buyer, taking into
account risk.


Appendix 2: Selling & Exit Issues
IPO’s 2008 Review www.ipohome.com
A Lost Year for IPOs
In light of the unprecedented financial crisis, interest in the IPO space all but
disappeared in 2008 and issuance volume sank to levels not seen since the
1970s as investors, burnt by sharp stock price declines, refused to put new
capital into the IPO market and are instead waiting for the market to stabilize.
This trend negatively impacted the performance of the Renaissance IPO
Index, which saw a major drop in the second half of 2008 after many years of
significant outperformance.


IPO’s 2008 Review www.ipohome.com

Financial
Technology


IPO’s 2007/08 Review www.ipohome.com

SPAC – Special Purpose
Acquisition Company

Healthcare

Business
Services

Technology
Financial

Energy


Appendix 2: Size of Deals
2008 www.ipohome.com


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