Building Value For A Greater Return

Many business owners should not necessarily be looking to sell their business simply because financial conditions are tight and they have no alternate exit strategy. Rather, owners should be seeking to maintain, and even grow their businesses, so their assets can emerge in a strong position when the economy strengthens.

There is currently an ‘expectation gap' between the price business owners expect they could get for their business were they to sell now, and what they would realistically get. Valuations of businesses based on multiples of earnings before interest and tax (EBIT) hit all time highs sometime ago, with multiples in excess of 10 times or more and purchasers typically funded their acquisitions with a lot of debt. However, these multiples have dropped in recent times.

Today, however, in the context of the global economic crisis, there are a number of obstacles to overcome for vendors.  Convincing the market that earnings are sustainable in an uncertain business climate requires a business to have a solid history of growth and market share to be attractive, and the business needs to have a solid management team.

A vendor needs to understand that multiples of EBIT are likely to be 4, and not 10 plus. Also, purchasers are unlikely to be able to raise debt to fund an acquisition.  With banks now extending less capital to prospective buyers, and buyers having to use more of their own equity for working capital, selling a business in the current economic climate will likely prove more challenging.

For business owners, there are opportunities to expand one's business through strategic acquisitions and build value accordingly. By weathering the current storm, growing your business strategically and through the careful planning and implemention of a succession management plan, business owners can be in a strong selling position once the economy picks up. The aim is to build on EBIT, and if multiples increase in a buoyant market that will be a plus.

Planning succession

The biggest mistake that business owners make is assuming that leaving their business will be easier than setting it up. Business owners that panic and look to suddenly sell their business because conditions are tough have the potential to face a very tough selling process. Business owners need to seriously consider allowing potential investors onto their share register if the conditions are right to expand through acquisition.

Succession and exit planning is not a single event but a deliberate, tailored process that requires planning, teamwork and constant re-evaluation. The implementation of a good succession management plan will ensure that when it is time to sell, business owners maximise the sales value of their business and are not caught out by unanticipated difficulties in the exit process.

While it is premature to ponder the issues of succession in the early stages of a business, forming a view about an exit strategy and building some process around that will pay dividends in the longer term. Succession issues need to be considered at a much earlier stage than most may consider necessary. The final stages of any planned exit will still require a time period of anywhere between 1 year and 3 years.

Succession planning is not just about how a business owner plans to leave the business to their heirs. Succession or exit planning is ultimately all about:

1. The eventual transfer of both management and control in a way that ensures the long term continuity of the business
   
   
2. Maximising the value of the business
   
   
3. Developing strategic and business plans to achieve the above
   
   
4. Developing and implementing a framework of systems and procedures that support the business both at an operating level, and the objectives noted in the first two points above
   
   

Succession does not mean planning for a single event that results in the exit of the founders of the business either from ownership or control, however, that is the ultimate aim. A series of succession events may include passing control and management of the business to family members during the lifetime of the founders, control and management passing to family members or business partners upon the death of the founders, or the founders exiting the business through a liquidity event such as an outright sale or a merger.

Practical advice for business owners to build value for their business

• Develop the management team as far as possible so the business can operate on a day to day basis without you
  
  
• Make every effort to keep your key people, particularly if you are in the service sector. Buyers will be very interested in the staff assets of the business and their retention post-sale
  
  
• Consider the timing of major investments in new product development, systems or property
  
  
• Remove non-core or less profitable assets or business operations. Address and remedy identified weaknesses that may cause issues or delays during due diligence
  
  
• Restating historic performance to show real performance of the business by removing non-recurring items. It is also important to highlight the star performing elements of the business as these may be masked in the normal financial reporting
  
  
• Identification of synergistic savings in the information memorandum so the buyer is clear on what could be achieved by combining the businesses
  
  
• Reduce the risk of customer / supplier dependence as far as possible
  
  
• Ensuring that your information systems are up-to-date and transparent
  
  
• Formalising contracts with key staff, customers and suppliers
  
  
• Review of employee entitlements to ensure the extent of any liabilities is fully understood
  
  
• Ensure all legal agreements and documents are up-to-date
  
  
• Ensure any actions against the business both externally and internally are at a point where the outcome is reasonably certain, and the issues leading to these have been resolved as far as possible
  
  

Common pitfalls

In my experience the barriers to successful succession include:

• The founders not letting go of day to day management (once the business has reached a size where the best use of the founder's time is to take a more strategic role in the business)
  
  
• Not paying enough attention to the financial drivers of the business, and having inadequate management information available on a timely basis
  
  
• Not recognising skill deficiencies to take the business to the next level, and not building a solid team of employees and external advisers
  
  
• A failure to align the interests of all the stakeholders. This may, for example, require a mechanism to provide key employees a share of the upside of capital value of the business
  
  
• Having unrealistic expectations about the value of the business

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