Don't Sell Yourself short

Don't Sell Yourself short

Selling your business? It will take more than a vase of flowers on the front desk to attract the interest of a prospective buyer in the increasingly global IT industry.

The consolidation and globalisation of many industries - in particular the telecommunications sector, ISPs and the IT industry in general - makes for a prime opportunity for companies that have already done the hard work to reap the benefits.

In this environment, the attractiveness of established, successful players cannot be underestimated, especially in a market as relatively isolated as Australia. "If you want to set up a company there are a lot of unknowns and a lot of expense. It is also much slower so in the end it is better to buy someone than it is to start from scratch," claims John Palfreyman, managing director of venture capitalist firm Baltimore.

The first step to taking advantage of this market atmosphere is to determine why you are selling your business. Not surprisingly, this influences the options you have and may limit how you sell it, to whom and for how much.

"If a business is going bad it is referred to as a fire sale," explains Palfreyman. "This means you don't have the luxury of time in selecting a buyer and a deal. You pretty much have to accept the first offer."

Yet according to Richard McLean, marketing manager of Solution 6, there may never even be a first offer. "If a company is in trouble it is much less attractive to a potential buyer. Even if it is cheap it is easier to fund the acquisition of a successful company than manage an unsuccessful one."

The more strategic approach stems from a business selling for expansionary or profit generating reasons. "If you are not panicked about selling your business, you can take a much more strategic approach," suggests Palfreyman.

Although relatively obvious, this illustrates that timing is all-important in selling your business. "Those who think that timing is simply fate are kidding themselves. It is the people that believe this type of scenario is always in their control that will get a better deal because timing is critical," claims Andrew Carroll, a partner at investment bank Harrington Partnership.

Yet it is not only the state of the business that will determine when and how you sell your business. It can come down to personal motivations and business aspirations. "There are three types of sales," says Carroll. "The trade sale where businesses combine to create a certain synergy, or reduce costs or create a 'one-stop shop'. Then there is the financial investment sale where it is simply a means to raise capital. And there is a public float where the goal is to stage an exit over time."

The options

Obviously each type of sale will attract different buyers and investors. But there are standard methods of finding a suitable patron because it is only the lucky few that will be able to sit back and watch the bidding begin. The rest must rely on their own tenacity. The direct approach is one option and simply entails approaching a buyer you think is in the market for a company like yours, regardless of whether they are actively seeking to buy. "Find out who the CEO is and put the idea forward," says McLean.

Alternatively, set your accountant on the trail of uncovering a business that would want to buy you. Or simply advertise. "By advertising in the trade press you can work out what a company is like through the style of the ad," says McLean. So be careful. If you want to look professional make sure the ad projects this. If you want to appear innovative ensure that this message is conveyed. Often an advertisement can do more harm than good if it sends out the wrong impression.

Carroll counsels against advertisement and believes it is the least effective medium. "People have to be cognisant of the impact the business being up for sale will have on the market. Normally, it does not give a good impression, regardless of why the business is for sale. For that reason we generally advise that the sale is done as secretly as possible." However, Carroll concedes the difficulty of "keeping a lid on it" so suggests that companies have a damage control plan organised.

Palfreyman suggests putting up a brief memorandum of your intent to sell and then look through a database of potential buyers and send them the information. However, in determining who should have the privilege of buying your business he cautions a selective approach. "A business won't want to buy another business that has the same product set or is in a completely different geographical region where there can be no assimilation." So be discriminate in approaching buyers or you might just end up with one you don't want.

Familiarity breeds intent

Carroll concurs with the selective approach, to the point of suggesting that most companies are bought by someone already familiar with their business. "Most sales are to people a business already knows, they have just reached the point where it now makes sense. They might have never even thought of it before," Carroll says.

Once you have determined why you are selling your business and what type of buyer you are looking for, the options on how you should present yourself to prospective buyers becomes clearer. "One of the difficulties as an acquirer is that a lot of businesses don't have up-to-date accounts so the due diligence process takes longer than it should. So one of the first things a company selling itself should do is get an accountant to structure their accounts properly," advises McLean.

McLean suggests that those putting themselves on the market simply can't get enough professional advice and recommends that all businesses should employ one of the "big five" accounting firms and a legal firm to guide them through the often treacherous process.

Carroll agrees completely. "It is important during the sales process that the executives keep running the business. They can't afford to take their eyes off it and consequently erode its value." His answer is to hire a professional who can look after the intricacies of the sale while you still look after your business's core competencies.

According to Carroll, one of a third party's most important functions is to whip up a bidding frenzy. "It is crucial when selling your business to have multiple parties bidding for it. If you don't you won't get a competitive price and your negotiating position is weakened. With only one bidder you might be forced into agreeing to warranties that are biased towards the buyer. It is the accountant's or lawyer's job to keep as many players on the table for as long as possible; they can manage all the offers," explains Carroll.

Besides, according to Carroll "there are so many tax issues, warranty issues and diligence matters that a business owner is sure to miss some of them".

Due diligence

The due diligence process is where McLean feels the accountants and lawyers really come into their own. "There are several roles the accountant plays during the due diligence process. One of them is to make sure everything is true. Another is to determine what is the best price structure, which includes who gets the debtors. They can also help determine taxation issues and recommend a value to the transaction."

Yet accountants and lawyers can only organise and present a business to a potential buyer if it actually has the fundamentals in place. The figures have to show that a company can positively contribute to a purchaser's bottom line and market position. "We look at three criteria when buying a business," says McLean. "Firstly, its earnings. How much it is going to produce and does it have a positive cash flow? Second is the people. The success of a business like ours is hugely dependent on the quality of people and the culture of our organisation. So we look to see whether a company has the intellectual property and knowledge that doesn't necessarily appear on a balance sheet. And thirdly, we look for market position. When a business wants to expand it can do it in three ways. A new product into an existing market; an existing product into a new market; or an existing product into a new geography. Generally you don't want to do all three at once so you look for a company who can help you move into either one or two of those categories," explains McLean.

So as you are preening your business for sale you need to look at your strong points but also be aware of what buyers are looking for. They might be aware that you have a great product X but it might be your market strength in Timbuktu that will cinch the deal for you.

Palfreyman agrees that cultural fit, geographical compatibility and product synergy are all major factors in the buying process. Yet it can come down to a much more basic equation: price. "Establishing a price is obviously important. You don't want to undersell your business but you certainly don't want to price yourself out of contention," he stresses.

Australian buyers are also looking to establish or consolidate an international presence, mostly through acquisitions or mergers. This situation lends itself to companies who promote their regional or even international experience or relationships. "In Australia, there is no way you can be a global player if you are marginalised in one region," says Palfreyman.

In the contemporary IT world, companies Carroll describes as "showing a lot of blue sky" can also appear attractive, even when they are losing money. "Take, for example, ISPs. They aren't making any profit at the moment but they have a certain sex appeal and a lot of potential," submits Carroll. So even if your company's books are not looking too healthy there is always something you can sell.

So a buyer has been discovered. Everyone is cracking open the champagne and planning the retirement trip around Europe. But the deal is far from done. The due diligence process can be an intense experience where all the promises you have made are examined in minute detail. This is the stage where your desires and those of the prospective buyer must meet squarely in the middle. You must prioritise what you really want and what is negotiable. "There are a lot of questions that need to be addressed before anything can happen," warns Palfreyman. "You need to establish what will happen to your staff, what position you will assume because generally a buyer will want the business manager to stay.

Money matters

"You need to fix a price and a payment method. If it is cash there will be the extra burden of making sure that warranties back up the confidence that the due diligence process uncovers. If it is a share swap the seller must make sure that the price paid for the business covers the capital gains liability they will experience down the track. A buyer needs to establish that there is no outstanding debts and that everything is Y2K compliant, or if it isn't that will affect the price."

Carroll estimates that if you're a "clean business", that is you are a profitable company with no skeletons in the closet, selling your business could take about three months. If the company has a dark past it could take anything up to a year, according to Carroll. "If your company is in trouble you'll need to find a buyer who wants it for particular reasons. This could take a while."

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