For sale: But is your business ready?
Thursday, February 21, 2008/
Storm clouds are gathering, and you may be asking if it time to sell? But are you, or your business, prepared? By MIKE PRESTON.
By Mike Preston
Storm clouds are gathering, and you may be asking if it time to sell? But are you, or your business, ready?
Economic conditions could see record numbers of entrepreneurs put their business on the market in 2008, but those who sacrifice careful planning in their haste to sell could find themselves with a post-exit hangover.
A flood of exiting baby boomers at the small end, and the growing impact of tightening credit conditions on bigger businesses, mean the chance of securing a lucrative exit is declining.
In these tougher selling conditions, only entrepreneurs who have taken the right steps to prepare their business for sale will achieve a premium price.
More than that, however, the rush to market means even those business owners who manage a lucrative exit may find they are unprepared for the loss of something of even greater value – the job that defined their lives and gave them purpose.
Are you ready to sell?
1. You are offered the right price: Howard Riley says he would have walked away a from private equity offer to buy his national container business, Bulk Handling Australia, earlier this year if the price hadn’t been right.
But when offered the right price (which Riley describes is as “very satisfying”) it was non-financial factors that made up his mind to sell a controlling share in the business.
“It was a gut feeling more than anything else,” Riley says. “I just realised I was tired, I’ve been running the business for 20 years and I was ready to enjoy life.”
2. You feel like you’ve had enough: Riley says his responses to various challenges the business had thrown at him over the past year that made him realise that he’d had enough.
“We had a couple of difficult staff issues and then we lost a long-term customer – and a long-term friend really – when a new buyer came in and took the business off us, and I just said inwardly I don’t need this anymore,” Riley says.
Curt Rendall, an experienced business adviser and principal of accountancy firm Rendall Kelly, says the fed-up factor is increasingly an issue for many of his baby boomer age clients.
“Tiredness is a huge factor,” he says. “A lot of these people have been working their guts out in their business for the last 40 years and it does takes its toll.”
Rendall has seen an increase in the number of businesses being put on the market by baby boomer business owners – a trend, he says, that may have something to do with their suspicion that economic hard times are ahead.
“People do reach a limit and then when they start seeing some hard times on the horizon – and these people have been through recessions, so they can see the bad times coming – they make the decision to get out.”
3. Your business could grow faster without you and you need a new challenge: Robert Beerworth is just 28, but after 10 years running his online design firm Wiliam he has started looking to the next business horizon. Late last year he said he had a three year exit plan, but a frenzy of consolidation in the online sector has forced him to consider a more rapid exit.
The prospect of a strong sale price has been a factor in Beerworth’s thinking, but a bigger driver has been his feeling that an exit is a natural part of his business’s growth process.
“It’s more actually about pride in what we do and knowing what we do is at that top level,” Beerworth says. “We want to feel good about getting out – right about staff, and realising that it was the right move so that the business would go on to achieve even more.”
A desire for personal change is clearly a consideration for Beerworth. “It’s part of a personal plan.
I’ve been here for 10 years and after that kind of period you do want to try new things, so I would probably stay in the internet industry but in a different area,” he says.
William Buck corporate advisory director Phil Bradley says a classic sign that it is time for an entrepreneur to get out is when they have lost the passion to grow their business.
Bradley says he has seen businesses outgrow the management capabilities of their managers, often where an entrepreneur is so integral to a business that it won’t stand up without them.
More often, however, business owners will hold back the growth of their business because they are not comfortable with the impact that growth could have on their working lives.
“I have seen a lot more of this in the past few years,” Bradley says. “Many owners know they can get more profitable growth, but realise if they do they will have to work harder, borrow more money and reinvest what the bank doesn’t take. When the owners are doing very well and living excellent lives already, some say enough is enough and look for simpler ways to enjoy their business.”
Bradley cautions that business owners who fail to recognise they don’t have the ability or inclination to take their business forward could end up swapping short term security for long term pain.
“Business owners should start thinking they are just going through the motions and are not interested in growth,” Bradley says. “If businesses don’t grow they usually die.”
Is your business ready to sell?
Whatever the motivation for selling, it is important to realise that making the decision to exit is just the beginning of a whole lot of hard work, rather than the end of it.
Chris Allen, the national chairman of specialist SME advisory service PKF Enterprise Advisers, says business owners need to start planning for an exit five years before the sale, depending on the size of the business.
Allen sets out three main steps an owner needs to implement to get their business ready for sale:
Make sure the business can prosper without you
Passion is often a great strength of entrepreneurs; but not such a great strength is having the time and patience to get all of their knowledge about the business, its customers and processes down on to paper and into processes.
Allen says many business owners get a shock when they are told the price they will get for their business will be lower because its income is overly connected with “personal good will” – the proportion of the businesses income attributable to them personally.
Wiliam founder and managing director Robert Beerworth says he began implementing processes and procedures in order to put innovation into the bones of the business soon after he started considering an exit.
“If we sell the business it can’t be predicated on my being here. We’ve got plenty of other great people in the business, but many of them are probably here because I’m here too. So we need to build the business past relying on a collection of strong individuals to embed processes that will continue to drive quality and innovation,” Beerworth says.
Get the legals and financials organised
There are a whole range of legal and financial processes a business needs to go through to ensure a smooth sale process and a tax effective outcome for both buyer and seller.
Allen suggests a good place to start planning for a sale is to have a comprehensive audit done of the business.
“Audited accounts add credence and validity to the numbers and makes any due diligence process easier, as well as giving a degree of comfort to any purchaser,” Allen says.
It is also a good opportunity to examine the extent to which the owner’s personal expenses have been running through the business – Allen says business owners are often surprised just how much money they are taking out of their business.
Ensuring key employee and customer contracts, shareholder interests and company constitutions and board minutes are in place and valid are also important steps on the way to sale.
Put a management team in place that is ready to take the business forward
Except for micro and very small businesses, most buyers will not be looking to step into the chief executive’s chair, so knowing that a competent management team will remain in place after the sale can add a premium to a business’s value.
Bulk Handling Australia founder Howard Riley, for example, has agreed to remain at the helm of his business for up to six months until a new chief executive is ready to take over.
“It’s really just about doing everything you can to make the transition as seamless as possible for a buyer,” Allen says.
What will you do afterwards?
While operational considerations will be central in the lead up to the sale of a business, entrepreneurs also need to prepare themselves for what life will be like after the exit.
This is a big issue for people planning to retire, particularly for those facing a change of lifestyle after having run a business for a long period of time.
Serial entrepreneur and Australian Graduate School of Entrepreneurship professor Tom McKaskill says business owners often fail to think through what they do after the sale.
Many entrepreneurs’ self-identity is intimately wrapped up with their business achievements, making it dangerous for them just to walk away without something to fill the void.
“They do the world trip, play a few rounds of golf and then start wondering what they will do everyday,” McKaskill warns. “If they haven’t planned ahead they can fall into big black hole that can lead to illnesses, depression, and in some cases suicide.”
He advises business owners planning on retirement – even if that involves still managing family investments – to talk with family and make a clear plan about what post-business life will hold and cast an eye to options such as working for charities or active involvement in hobbies.
Riley will remain on the board of Bulk Handling Australia and says he is not nervous about whether he will adapt to life in retirement.
“I’ll do some travel, maybe buy a few racehorses, and certainly travel in Australia and overseas. A few people have said they think I’ll be back in six months. I couldn’t rule that out, but I would never start a business from scratch again, if I got an offer to sit on a board I might do that,” Riley says.
Another option that will suit many people is some form of work-out arrangement that allows them to have a continuing role in the business for some defined period or until certain growth or profit objectives are achieved.
“Staying involved but stepping back from 24/7 work suits a lot of people,” McKaskill says. “Something that involves working three days a week can allow others to take the heavy lifting, help the owner transition to a different pace and also make the business more attractive to a buyer coming in.”
There is a another alternative, of course – stay in the game, either by building a new business from the ground up, buying another business, or becoming an angel investor.
“Most entrepreneurs never stop, it’s in their DNA,” McKaskill says. “They see an opportunity to get out or want a change and get out, but they don’t stop being an entrepreneur. And I think that’s why so many angel investors are cashed-up entrepreneurs who just can’t stop.”
>> For tips on preparing for selling your business, see SmartCompany’s Business For Sale section.