Preparing your business for sale will not only help maximise the value, but can quicken up the sale process. By TOM McKASKILL.
By Tom McKaskill
Business owners who wake up one day desperate to sell their business, and move quickly to put it on the market, throw away a lot of value on sale. With a little bit of preparation, the value of any business can be multiplied several times and, in some cases, many times.
The key to securing the highest price is to work out how the buyer can gain maximum value from the acquired business and then to prepare the business so that the prospective buyer can see its potential and be willing to bid a higher price for the business as a result.
The basic theory underlying investment value is net present value. Future net earnings are discounted using a risk discount rate to arrive at the net present value of the investment (NPV).
Providing the buyer acquires the business for a price equal to or less than the NPV, they should (on average) achieve their target rate of return. This suggests that the vendor can best prepare their business for sale by maximising the future stream of net earnings and by having the buyer apply a lower risk rate to that earnings stream.
Since the future stream of net earnings will be created through business productivity, revenue growth and business potential, any improvement in these components will affect the value of the business. For example, a 10% cumulative growth in net earnings will double the value of a business, while a 20% cumulative growth rate will increase the value of the business by a factor of five.
With these possibilities in sight, some attention to profitability and growth is worth the effort, and certainly worth delaying the sale while the foundations for such growth are created.
In calculating the potential value of the acquisition, the buyer will also be considering how much risk there is in the business and how long it will take to get the business to a point where any growth potential can begin to be exploited.
The underlying risk clearly affects what risk discount rate the buyer will use. Thus a business that is well managed, has good internal systems for performance setting and evaluation and has good governance is going to present less risk to the buyer.
A business that is efficient and productive and ready for a thorough due diligence review is going to be much more attractive and considered less risky by potential buyers. A business that is ready for new management and well positioned to take advantage of growth opportunities is also going to represent a more valuable investment by the buyer. Lower risk equates to a lower risk discount rate, which in turn increases the value of the business.
Instead of running out to find the nearest business broker who will advertise the business to everyone, the entrepreneur should spend some time to consider what type of buyer could best exploit the potential in the business, and how the business should be prepared to allow the new owner to manage the business to take advantage of that potential.
Since not all potential buyers are capable of exploiting the potential in the business, the vendor should also consider how to attract the right buyers. It is only by finding buyers who are willing and able to exploit the business potential that the vendor will be able to extract the highest price in a competitive bid.
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.