There’s an old saying, that’s been mainly credited to the Emerald Isle but has worked its way around the world, regarding a stranger asking for directions - to which the local response is “well, I wouldn’t start from here if I was you”.
When I think about the process tackled by business owners as they look to a potential sale of their business this often comes to mind.
After all, if you want to get somewhere, then it’s better to start from a place where you have a good chance of reaching your goal.
But just because you want to sell all or part of your company doesn’t mean the market is ready to buy; whether that’s a trade sale, IPO or a capital raising.
Markets can be fickle and particularly in Australia factors like the USD/AUD exchange rate have a material impact on valuations and business cases for overseas buyers (though currently this is trending the right way of course).
So, if you’re thinking about selling your business what are the steps you should be taking?
First things first, hopefully you’ve been thinking about this for a while and ‘Exit Strategy’ has appeared on the Board agenda at least once.
One of the best exercises you can undertake is to prepare an Information Memorandum (known as an IM), there are lots of sample ones on the Internet to choose from. Larger companies have these prepared by outside parties but there’s no reason you can’t do this yourself.
The idea is to create a prospectus that any potential suitor could use as a basis for understanding what your business does, how it has performed and what it’s prospects are in the future.
Make sure any data you use is 100 percent verifiable and don’t go overboard on creating outlandish forecasts for the next 3-5 years’ growth - buyers generally pay little attention to sellers’ graphs of forecasted sales and will rely on their own analysis anyway.
Also, be careful not to trim costs too aggressively as you head into a potential sales process - it’s quite common to trim a little fat in advance of a sale but if you cut too deep it will be noticed and questioned under due diligence.
Providing a valuation for any business is difficult due to a number of factors including the type of business, consistency and growth of revenues, customer retention, business track record, perceived risk from external events, strength of competition etc.
The general rule of thumb has always been a range of 3-5x EBIT rising to 7-10x EBIT in a strong market or for companies with a particularly strong market position.
For emerging businesses revenue multiples are a better guide than profits, notably ‘as-a-service’ companies where profits are lower in the first few years due to the nature of annuity revenues but the longer term profit growth prospects are strong. In these cases, 1x revenue is a rough guideline.
Ultimately, like everything else in life your business is worth precisely what someone else is prepared to pay for it and strategic fit for a potential buyer will often mean these multiples are ignored as we see in some of the deals typically done in the USA where valuations can rise significantly higher.
One of the challenges with selling an Australian IT business is that local valuations lag behind overseas valuations and one of the best strategies you can employ is to target overseas buyers, especially USA where weakening exchange rates add to the attractiveness.
My advice is to talk to a mix of specialist IT&T advisory companies to get their perspective on valuation - they do deals for a living and will have a good sense of the prevailing market dynamics.
For all the potential sellers out there, be realistic about price if you’re serious about selling. Most sellers think their business is worth more than it is and it’s usually because of the blood, sweat and tears that have been involved in growing it to this point, except you can’t see blood, sweat and tears in a P&L or Balance Sheet.
There’s simply no point starting the process if your expectations are unrealistic.
Getting the deal done
At this point you will need to have appointed an advisory company to help you with the process and negotiation, expect to pay a fee of around three percent of Enterprise Value to the advisor, some of which is likely to be retainer based.
You will also need legal representation of course and the due diligence process will be thorough so be prepared. These days it’s all done via online data rooms that speeds up the process considerably and the golden rule is a good DD process is a fast DD process.
Make sure you leave plenty of room in your diary to respond to requests because you have to keep the process moving and delays cause problems.
Also, expect buyers to want to talk to some of your customers and get this set-up beforehand and decide whether a deal with a stock component is going to be acceptable to you.
Everyone loves cash but being prepared to take stock in the acquiring company as part of a deal is a big plus point to some purchasers that don’t have easy access to cash.
Most buyers will want some or all of the management team to stay on, at least for a transition period so be prepared for this when negotiating as it can get tricky when you are negotiating as the seller but also taking a new role in the company where you are effectively on the buy side, so take advice here.
At the end of the day selling a business is like buying a house; what you want is multiple buyers to drive valuation and your advisors will be able to help identify and target companies you can approach.
Top 5 ways to position yourself for acquisition:
- Understand your value proposition - build your Information Memorandum
- Get realistic on valuation - you’re not Instagram
- Clean House - get your books straight and audited
- People - ensure your most valuable players are on key person contracts
- Take advice - don’t scrimp on advisors, you will need professional help
Mark is an Executive Consultant with the boutique Advisory and Consulting organisation Tech Research Asia where he focusses on working with established and emerging technology vendors across the Asia-Pacific region.
This article was originally published in the June issue of ARN Magazine.