In my article How to Maximise your Business Value through Exit Planning I discussed closing the gap between your current business value and other higher-valued businesses in the industry.
Where can you make your business more valuable compared with other NZ and Australian businesses, what are the improvements to close the valuation gap?
As you improve those factors the valuation multiple increases, more on this in the first section Business Attractiveness.
The second part is "readiness". A business can appear attractive but on due diligence, buyer expectations fail to be realised. They then make a reduced offer, in M&A this is called a "retrade", leading to the transaction falling over.
Frankly, the M&A process is far from perfect and what we want to do is not just make the business look great (through an information memorandum for example) but also meet the buyers' expectation when put under the due diligence microscope. This latter stage is called Exit or Business Readiness, more on this below.
The approach is called the ValueMax approach by an Australian company called Maus Business Systems.
Picture (below): Business Attractiveness and Readiness Graph
Let's get into the details. There are different questionnaires that exit planners use. I use the Maus Business System (given it originated across the Tasman) so I'll go through these.
The questions ask you to score yourself versus the best-in-class competitor. If you score yourself the highest (6) then you are the best in class. If you score yourself the lowest (1) then everyone else is better than you. Remember what we will then do is place you on valuation multiple continuum with the best companies at one end and the not so good on the other end.
The Maus system breaks business attractiveness questions into groups of factors: business, forecast, market and investors.
- how many years have you been in operation?
- how good is your management team?
- how loyal are your customers?
- how well known and liked is your brand?
- how many customers are on your database?
- have you developed IP/tech?
- do your staff have employment agreements?
- if location is important, how well are you located?
- how reliant is the business on a single owner?
- do you good marketing systems?
- do you have good business systems i.e. software (CRM, accounting, stock etc) and processes
- have you been profitable in the last twelve months and for the last 3-5 years?
- what are your projections for profit growth?
- what are your projections for revenue growth?
- do you have predictable revenue streams?
- do you have recurring revenue streams?
- is the market growing?
- is it difficult to enter the market i.e. barriers to entry?
- how strong is your competitive advantage?
- are you the market leader?
- does the industry have a good outlook?
- why are you selling?
- are their industry buyers who would be strongly interested?
- is less or more risky?
- is their strong interest in the industry?
Having answered those questions we can see where the gaps are versus the competition and industry business sales. Perhaps your best in class—great news, little or no work needed across the factors. Perhaps you're not so good—best to make some improvements before going to market.
Business Attractiveness drives the multiple in a business sale.
As in "readiness" for the sales process.
The Maus system breaks questions into these groups of factors: valuation, personal expectations, shareholder goals, payment considerations, value readiness, credibility and justification, brand issues, marketing documentation and systems, employee and management issues, financials, management systems and forecasts, company documentation, intellectual property, customer contracts, expense contracts, personal knowledge, systems and processes, compliance, profit improvement, government grants, revenue drivers, and product strategies.
I'm not going to go through each group questionnaire!
Rather, here's a description of a company ready to exit from a readiness point of view. The owner knows how much the business worth and is happy to sell at that figure even if there are improvements.
They know what they're going to do post-sale and are ready for suddenly not working 60 hours per week. They have sufficient retirement funds.
All shareholders are in alignment with how to exit and who will buy the company.
The transaction structure has been discussed and taxes considered.
The business has consistent profits, not reliant on the owner, and well positioned for growth.
The business demonstrates that customers really do appreciate their products and services as shown by testimonials, lists, awards etc.
The brand is protected, valuable and transferable.
Marketing systems are in place with a file of previous campaigns and related performance data.
Capable management can run the company without the owner, indeed it already is happening for months at a time. All the employees are trained, have job descriptions, are paid at market rates, and have solid employment contracts. The company has good morale, low turnover and strong management.
Financials are in good shape and tax, customer/product sales and management reports are easily available including any earnings adjustments for valuation purposes.
A 1-year and 3-year forecast has been prepared and can be justified in detail.
Company documentation including formation, registry, trading and limited liability names are available.
All trademarks, patents, software copyrights and domain names are available to view and are kept updated.
Customer contracts, major project contracts, partner agreements exist and are available to view.
Supplier contracts, leases, insurance, websites contracts and other contracts exist and are available to view.
The shareholders understand about valuation and the criteria buyers will use.
Systems and process are in place including CRM, accounting, stock taking, customer database and leads.
Tax, KiwiSaver, holiday leave and GST are all up to date.
Expenses have been analysed and managed to the point that they can be sensibly reduced any further including staff, insurance, inventory and banking.
Government funding and tax concessions have been maximised.
Revenue drivers have been examined to see if there are opportunities including average sale value, frequency, customer acquisition and retention, leads and conversion rates.
You've launched new products and gone into new markets.
That's a description of a company that is very ready for sale, no company is perfect so it's unlikely but illustrates what is required.
Exit Readiness drives the likelihood of success of a business sale post due diligence. Related to that is that it also confirms the risk of investment to the buyers.
The process is to find gaps in value between best-in-class industry peers across Australasia through the exhaustive Attractiveness and Readiness questionnaires outlined above.
Having identified the factors that can be improved we decide whether we can close those gaps, whether the improvement will be sufficiently large to be worthwhile, and how long it will take.
We may choose to sell in the next 6 months and only make those improvements that are low hanging fruit then list the other improvements in detail for a future buyer. Or we may spend 2-3 years making major improvements. Customer concentration is a good example. We may do what we can in a few months and then sell but provide a strategy to a buyer to improve the customer concentration. Or we may spend 3 years on a customer acquisition project to reduce the customer concentration.
A business makes up most of an owner's personal wealth, rather than make a hasty decision to sell, why not fully prepare the business and maximise the chances of both the value and the transaction completing.
Traditionally a New Zealand business owner would make the decision to sell the business without sufficient preparation. This can result in missing out not just a multiple of earnings (Attractiveness) but also closing a transaction for a good price (Readiness). Exit planning helps to increase the price and ensure a sale completes.
In the next articles on exit planning, I'll cover the personal side—are you financially and personally ready for the next stage of your life.
Peter Hickey is one of Australasia's best exit planners and founder of Maus Business Systems. Here's how he puts it in this his video, its 6 minutes long. The first four minutes covers business attractiveness and readiness then he discusses personal readiness which I'll discuss in other articles.
Video: ValueMax Readiness and Attractiveness
(Note you may need to scroll down the page due to an odd formatting error with the embedded video.)