Garnering a premium on the business you are selling will seem more straightforward if you put yourself into the position of the potential buyer. By TOM McKASKILL
By Tom McKaskill
When you buy a used car, house or camera, you are not that interested in how the previous owner used the item. What you are focused on is how you are going to use it and whether you will achieve the benefits you seek.
If you decide to use it in an entirely different manner to the last owner, their experience and use may be completely irrelevant to your evaluation of the item. With this in mind, consider your own business – how is the buyer going to utilise the assets and capabilities within it? They may be intending to operate the business very differently from you in order to achieve greater profits from it.
The key to a premium on sale is to find the buyer who can exploit your business better than you. If you are able to set your business up so that they are able to generate higher profits from your business than you were able or willing to, you may be able to capture some of those higher profits in your sale price.
There are two possibilities for generating such a premium. The first applies to sales of businesses based on the profit generating power of the business itself. I call this a financial sale. The value of the business is directly related to the net present value of the future stream of profits generated from the resources of the acquired business.
The alternative is a strategic sale where a large corporation is able to exploit the underlying assets and capabilities of the acquired business through, or in combination with, its own resources. Such a situation often occurs where a product or capability is dramatically scaled up to meet the demands of a large distribution network owned by the acquiring corporation.
In both these cases, the key to a premium on sale is to create a platform from which the acquirer can rapidly achieve the benefits they seek in the acquisition. Thus a financial buyer will be interested in growth potential in the business, while a strategic buyer will be interested in the rate at which the strategic asset or capability can be replicated or scaled.
In both cases, the anticipated speed of execution affects the value of the business to the buyer and greatly influences the willingness of the buyer to pay a premium.
In preparing the business for sale, you need to put yourself in the shoes of the buyer and think through all the activities that the buyer will have to undertake to extract the maximum value out of the acquisition at the earliest possible time.
You should then arrive at what your business should look like at the point of sale. This should include its structure, systems, products, location, assets and capabilities. Now, say, that is two years away. What do you have to do between now and then to create the ideal business that will be ready for the right buyer?
Preparing a business for sale is not just getting it ready for due diligence, it is also creating a business that is ready to be acquired and exploited – thus reducing integration time and building the capabilities required for the business to be expanded, replicated or scaled is the key to a premium on sale.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.