exiting your business - being exit ready

Presentation

Exiting &Harvesting Ventures

Michael RoyalCEO & Founder

BIR Solutions

P 1300 783 309 E [email protected] W www.bir.net.auAll information provided is subject to copyright

Presentation

Exiting &Harvesting Ventures

Michael RoyalCEO & Founder

BIR Solutions

Things to Contemplate forToday’s Presentation

• Why do you want to start up a business?• What are the most important issues in starting

up a business?• What do you want to know more about today?• What would make a difference to the

development of your exit strategy?• When is a good time to a) consider your exit

strategy and b) build your exit strategy?


• Why do you want to start up a business?• What are the most important issues in starting

up a business?• What do you want to know more about today?• What would make a difference to the

development of your exit strategy?• When is a good time to a) consider your exit

strategy and b) build your exit strategy?

Table of Contents

• BIR Solutions• Business Realities• Buyers & Sellers• Valuations• Selling & Exit Issues• Pre-Sale Process


• BIR Solutions• Business Realities• Buyers & Sellers• Valuations• Selling & Exit Issues• Pre-Sale Process

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Our SolutionsWe assist with your planned exit strategy

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$P 1300 783 309 E [email protected] W www.bir.net.au

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Business Realities:The Business Life Cycle Model

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Business Realities

• Business failure is high in the first 5 years of a business’life.

• Most successful businesses are not ‘sale ready’.• Buyers get to look at lots of businesses and learn by trial

and error during the acquisition process – Sellers onlysell once each time.

• Most owners only sell a business once or at most twicein their lifetime. They are chronically under-prepared forthe sale process and at best, learn on the job. They areexperts at working ‘in their business’ and perhapsworking ‘on their business’

• BUT NOT ‘selling their business’!


• Business failure is high in the first 5 years of a business’life.

• Most successful businesses are not ‘sale ready’.• Buyers get to look at lots of businesses and learn by trial

and error during the acquisition process – Sellers onlysell once each time.

• Most owners only sell a business once or at most twicein their lifetime. They are chronically under-prepared forthe sale process and at best, learn on the job. They areexperts at working ‘in their business’ and perhapsworking ‘on their business’

• BUT NOT ‘selling their business’!

Business Realities

• A business sale is the single largest transactionmost business owners will enter into. It has thecapacity to make them a lot of money – or theycan leave it on the table for the buyer.

• More business owners will be selling over thenext 10 years. Supply may outstrip demand =Prices for ‘average’ businesses will decrease.

• Most SME businesses sell for a multiple ofbetween 3 to 5 times earnings – if that is higherthan the Net Assets being acquired.


• A business sale is the single largest transactionmost business owners will enter into. It has thecapacity to make them a lot of money – or theycan leave it on the table for the buyer.

• More business owners will be selling over thenext 10 years. Supply may outstrip demand =Prices for ‘average’ businesses will decrease.

• Most SME businesses sell for a multiple ofbetween 3 to 5 times earnings – if that is higherthan the Net Assets being acquired.

Business Realities*** NEWSFLASH ***• SME business prices have hit a new low as baby

boomers looking to retire are selling into a buyersmarket.

• Growth in volume of sales has slowed (but stillgrowing).

• A continuing decline in values & multiples of EBITover the past 2 years.

• Many owners choosing to ‘liquidate’ rather than sellas a going concern

Source Bizexchange Index www.bizexchange.com.au

• CONCLUSION – TIMING IS EVERYTHING BUTPLANNING CAN HELP


*** NEWSFLASH ***• SME business prices have hit a new low as baby

boomers looking to retire are selling into a buyersmarket.

• Growth in volume of sales has slowed (but stillgrowing).

• A continuing decline in values & multiples of EBITover the past 2 years.

• Many owners choosing to ‘liquidate’ rather than sellas a going concern

Source Bizexchange Index www.bizexchange.com.au

• CONCLUSION – TIMING IS EVERYTHING BUTPLANNING CAN HELP

Buyers & Sellers

• Buyers buy based upon what they can make outof the acquisition on a best/worst case i.e. theirbest/worst case future earnings from the assetsbeing acquired.

• Who is the right buyer? Someone who is:• Identifiable & reachable.• Willing & capable of undertaking the acquisition before,

during and after the deal.• Will regard the deal as a sound business decision

before, during and after the deal.


• Buyers buy based upon what they can make outof the acquisition on a best/worst case i.e. theirbest/worst case future earnings from the assetsbeing acquired.

• Who is the right buyer? Someone who is:• Identifiable & reachable.• Willing & capable of undertaking the acquisition before,

during and after the deal.• Will regard the deal as a sound business decision

before, during and after the deal.

Buyers & Sellers

• Buyers discount for risk and rarely pay apremium for unverified potential

• Higher multiples are applicable where: Typical risks can be shown to have been removed. Potential future growth has been verified preferably

externally.


• Buyers discount for risk and rarely pay apremium for unverified potential

• Higher multiples are applicable where: Typical risks can be shown to have been removed. Potential future growth has been verified preferably

externally.

Buyers & Sellers

• Buyers who have a track record of buying arelikely to have an existing model for acquisitions:

• This is a plus as it makes it easier to identify how andwhy a buyer will buy and what they will buy.

• This is a minus as the model can restrict how much thebuyer is willing to pay.


• Buyers who have a track record of buying arelikely to have an existing model for acquisitions:

• This is a plus as it makes it easier to identify how andwhy a buyer will buy and what they will buy.

• This is a minus as the model can restrict how much thebuyer is willing to pay.

The Seller’s Job

• Identify what the buyer wants to buy (don’t sell themwhat they don’t want to buy – sell it elsewhere or hold onto it).

• Understand how the buyer wants to buy (previoushistory).

• Show the buyer what they can make out of the sale on abest case but likely scenario.

• Reduce or eliminate those risks/issues which impact onthe buyer’s worst case.

• Put forward a logical and persuasive argument as to whythe buyer should share with the seller part of the likelyupside.

• Have a plan for your life after the sale!!!


• Identify what the buyer wants to buy (don’t sell themwhat they don’t want to buy – sell it elsewhere or hold onto it).

• Understand how the buyer wants to buy (previoushistory).

• Show the buyer what they can make out of the sale on abest case but likely scenario.

• Reduce or eliminate those risks/issues which impact onthe buyer’s worst case.

• Put forward a logical and persuasive argument as to whythe buyer should share with the seller part of the likelyupside.

• Have a plan for your life after the sale!!!

Selling & Exit IssuesWhat makes a seller want to sell?

• Opportunistic buyer comes along at a ‘goodprice’

• Business/private circumstances change for theowner

• Owner does not have the desire / ability to grow& change

• Business requires major internal changes tosurvive / grow

• External forces requires a change in thebusiness to survive / grow

• Business requires new funding to survive / grow


• Opportunistic buyer comes along at a ‘goodprice’

• Business/private circumstances change for theowner

• Owner does not have the desire / ability to grow& change

• Business requires major internal changes tosurvive / grow

• External forces requires a change in thebusiness to survive / grow

• Business requires new funding to survive / grow

Selling & Exit IssuesTypical Exit Options

• Trade sale• Management Buy Out - MBO• Management Buy In - MBI• Private Equity / Venture Capital Fund Individual / Angel Investor

• Initial Public Offering – IPO• Liquidation & Planned Wind down – Asset sale


• Trade sale• Management Buy Out - MBO• Management Buy In - MBI• Private Equity / Venture Capital Fund Individual / Angel Investor

• Initial Public Offering – IPO• Liquidation & Planned Wind down – Asset sale

Selling & Exit IssuesFactors to Avoid in Business

• Not being prepared for an offer for your business• Losing control of your business External factors Internal factors Funding factors


• Not being prepared for an offer for your business• Losing control of your business External factors Internal factors Funding factors

Selling & Exit IssuesWhat Buyers Look For

• Trade sales Strategic advantages Synergies Continuation of revenue & containment of costs

• MBO’s & MBI’s Profits & cash growth to pay back debt, buy out a VC Growth to facilitate an IPO


• Trade sales Strategic advantages Synergies Continuation of revenue & containment of costs

• MBO’s & MBI’s Profits & cash growth to pay back debt, buy out a VC Growth to facilitate an IPO

Selling & Exit IssuesWhat Buyers Look For

• Private equity Return on investment through profits & growth Industry acquisition roll up Clear exit strategy 3 to 5 years – IPO / Trade Sale

• IPO Return on investment through profits and growth


• Private equity Return on investment through profits & growth Industry acquisition roll up Clear exit strategy 3 to 5 years – IPO / Trade Sale

• IPO Return on investment through profits and growth

Selling & Exit IssuesKey Issues to Exiting Successfully

• Be prepared. If unprepared, preparation for anunprepared business can take a long time: +2yrs

• Control the timing of your sale process & exit• Understand your business• Understand your likely buyers• Have 3 or more buyers available to create

competitive tension


• Be prepared. If unprepared, preparation for anunprepared business can take a long time: +2yrs

• Control the timing of your sale process & exit• Understand your business• Understand your likely buyers• Have 3 or more buyers available to create

competitive tension


• Keep the ‘during sale’ timeline tight to avoidinterest waning – this means being prepared

• Determine if your business is likely to be a Financial Sale Strategic Sale Or a combination


• Keep the ‘during sale’ timeline tight to avoidinterest waning – this means being prepared

• Determine if your business is likely to be a Financial Sale Strategic Sale Or a combination

Selling & Exit IssuesDefinitions

• Financial Sale

Where a buyer looks to the business acquisitionto provide future profits in its own right.

• Strategic Sale

Where a buyer seeks to gain a strategicadvantage which it either cannot develop itselfor which it cannot develop itself within a requisitetimeframe.


• Financial Sale

Where a buyer looks to the business acquisitionto provide future profits in its own right.

• Strategic Sale

Where a buyer seeks to gain a strategicadvantage which it either cannot develop itselfor which it cannot develop itself within a requisitetimeframe.


• Be able to answer the question “Why would Ipay more for this business than a standardmultiple of earnings?”

• Like any sale process you are selling the sizzle,not the sausage.

• Don’t forget the Buyer’s WIIFM – What’s in it forme?


• Be able to answer the question “Why would Ipay more for this business than a standardmultiple of earnings?”

• Like any sale process you are selling the sizzle,not the sausage.

• Don’t forget the Buyer’s WIIFM – What’s in it forme?


• Payment terms• Payments upfront reduce risk for the seller and so may

be lower price paid• Payments delayed increase risk for the seller (Will the

payment events happen? How will the payment eventsbe interpreted?) but reduce risk for the buyer and mayincrease the purchase price


• Payment terms• Payments upfront reduce risk for the seller and so may

be lower price paid• Payments delayed increase risk for the seller (Will the

payment events happen? How will the payment eventsbe interpreted?) but reduce risk for the buyer and mayincrease the purchase price

Selling & Exit IssuesFinancial Sale

• Key Attributes of successful sales:• Historical profitability• Sustainable profitability for the future = sustainable

competitive advantage in the existing business• Low business risks• Future growth opportunities for existing business• Management not being supplied by buyer must be

locked in and motivated to succeed


• Key Attributes of successful sales:• Historical profitability• Sustainable profitability for the future = sustainable

competitive advantage in the existing business• Low business risks• Future growth opportunities for existing business• Management not being supplied by buyer must be

locked in and motivated to succeed

Selling & Exit IssuesFinancial Sale

• Examples Private equity deals Most SME deals Many Listed company deals

• Types of businesses Most business sales

• Valuations – normally 3 to 5 times but perhapsup to 10 times as per this presentation


• Examples Private equity deals Most SME deals Many Listed company deals

• Types of businesses Most business sales

• Valuations – normally 3 to 5 times but perhapsup to 10 times as per this presentation

Selling & Exit IssuesStrategic Sale

• Key Attributes of the business:• Unique attributes not readily available ‘today’• Attributes are scalable• Attributes can be amalgamated into another (larger)

business• Sustainable competitive advantage• Low business risk• Management who can unlock potential must be

motivated & retained


• Key Attributes of the business:• Unique attributes not readily available ‘today’• Attributes are scalable• Attributes can be amalgamated into another (larger)

business• Sustainable competitive advantage• Low business risk• Management who can unlock potential must be

motivated & retained


• Not Necessarily Required:• Historical profitability• Existing sustainable business model• Largeness compared to buyer can be a disadvantage –

disparity in size often holds the key


• Not Necessarily Required:• Historical profitability• Existing sustainable business model• Largeness compared to buyer can be a disadvantage –

disparity in size often holds the key


• Examples IT Hi Tech R&D Fashion Agricultural science

Telecommunications

• Valuations: can be a huge multiple of current earnings –often based upon buyers potential earnings rather thanseller’s historical earnings

• Why?The seller is seeking to share in some of the upside

which will flow through to the buyer from the acquisitionfrom acquiring the strategic assets


• Examples IT Hi Tech R&D Fashion Agricultural science

Telecommunications

• Valuations: can be a huge multiple of current earnings –often based upon buyers potential earnings rather thanseller’s historical earnings

• Why?The seller is seeking to share in some of the upside

which will flow through to the buyer from the acquisitionfrom acquiring the strategic assets

Pre-Sale Process

• Alignment of interests: Directors, Senior Management & Shareholders Build post-sale scenarios for stakeholders Make sure all stakeholders see upside

• Due Diligence Select the right Advisory team for your sale – Tax,

Audit, Negotiator Minimise risks for the buyer – discounts are made for

poor, incomplete or missing key factors + the costs ofdue diligence in achieving the proposed end result


• Alignment of interests: Directors, Senior Management & Shareholders Build post-sale scenarios for stakeholders Make sure all stakeholders see upside

• Due Diligence Select the right Advisory team for your sale – Tax,

Audit, Negotiator Minimise risks for the buyer – discounts are made for

poor, incomplete or missing key factors + the costs ofdue diligence in achieving the proposed end result

Pre-Sale Process:Minimising risks for the buyer

• External Factors: The impact of Porter’s 5 forces model (Competitors,

Customers, Suppliers, New entrants, Substitutes)• Internal Factors: Values = Leadership & Management Asset protection – intellectual, financial & physical Asset & Liability management – relationships,

agreements & compliance with agreements Systems & processes – incl. internal & external

verification Human Capital Retention strategies


• External Factors: The impact of Porter’s 5 forces model (Competitors,

Customers, Suppliers, New entrants, Substitutes)• Internal Factors: Values = Leadership & Management Asset protection – intellectual, financial & physical Asset & Liability management – relationships,

agreements & compliance with agreements Systems & processes – incl. internal & external

verification Human Capital Retention strategies

Pre-Sale Process:Minimising risks for the buyer

• Minimising due diligence risks: Have a history of audits from a reliable firm Have due diligence files ready and fully prepared Have risks identified and anti-risk strategies explained

• For each cost ‘sustainably’ removed from thebusiness, add at least 3 to 5 times its value

• For each risk removed from the business, add tothe multiple being used.


• Minimising due diligence risks: Have a history of audits from a reliable firm Have due diligence files ready and fully prepared Have risks identified and anti-risk strategies explained

• For each cost ‘sustainably’ removed from thebusiness, add at least 3 to 5 times its value

• For each risk removed from the business, add tothe multiple being used.

Pre Sale Process:Strategy

• Understand the buyers:• Identify likely buyers• Identify key attributes for these buyers which

Add a premium to the sale price Reduce the final sales price

• Set up non-sale communication with likely buyers• Implement strategies for adding value• Benchmark performance• Process improvements• Validate future profit potential opportunities


• Understand the buyers:• Identify likely buyers• Identify key attributes for these buyers which

Add a premium to the sale price Reduce the final sales price

• Set up non-sale communication with likely buyers• Implement strategies for adding value• Benchmark performance• Process improvements• Validate future profit potential opportunities

Pre-Sale Process:Strategy

• Premiums are added for strategic advantages,‘laid in concrete’ future opportunities Trial new opportunities to demonstrate their potential

is real Obtain Heads of Agreement subject to current

constraints being overcome (eg lack of capital toimplement)


• Premiums are added for strategic advantages,‘laid in concrete’ future opportunities Trial new opportunities to demonstrate their potential

is real Obtain Heads of Agreement subject to current

constraints being overcome (eg lack of capital toimplement)

Case Study #1Facts

• Manufacturer – food industry – 25 years• Turnover $30M increasing to $40M• Margin fluctuates• Recent history of losses• Local customers – mainly major retailers• Imported some key raw materials• Employees – many with long years of service• Union site• Small player in the industry• Competes with large global companies (local prod’n) &

other small local manufacturers


• Manufacturer – food industry – 25 years• Turnover $30M increasing to $40M• Margin fluctuates• Recent history of losses• Local customers – mainly major retailers• Imported some key raw materials• Employees – many with long years of service• Union site• Small player in the industry• Competes with large global companies (local prod’n) &

other small local manufacturers

Case Study #1Issues Impacting Saleability

• Does it have any competitive advantage orunique selling proposition?

• Are its global competitors interested?• What other local competitors might there be?• Is the industry open for some form of horizontal

roll-up?• Can it sell to overseas markets?• Does it have brand(s) recognition?


• Does it have any competitive advantage orunique selling proposition?

• Are its global competitors interested?• What other local competitors might there be?• Is the industry open for some form of horizontal

roll-up?• Can it sell to overseas markets?• Does it have brand(s) recognition?


• Can it manufacture off shore?• What is the history of OH&S & EPA?• What redundancy costs if business is relocated?• Is Plant & Machinery up to date & efficient?


• Can it manufacture off shore?• What is the history of OH&S & EPA?• What redundancy costs if business is relocated?• Is Plant & Machinery up to date & efficient?


• What about debt?• What about profitability?• What about cashflow?• Does it have detailed systems & processes for: Manufacturing? R&D? Market Research?

• Is it a sale of business & assets or a sale ofshares?


• What about debt?• What about profitability?• What about cashflow?• Does it have detailed systems & processes for: Manufacturing? R&D? Market Research?

• Is it a sale of business & assets or a sale ofshares?

Case Study #2Facts

• Distributor – capital equipment construction – regionalterritory (VIC)

• $9M turnover New Unit sales – low margins 2nd Hand Unit sales – reasonable margins Service sales – reasonable margins Parts sales – high margins

• Has been improving processes• #3 amongst competitors in Construction Industry• Australian Distributor is subsidiary of global supplier• Floor plan finance for stock


• Distributor – capital equipment construction – regionalterritory (VIC)

• $9M turnover New Unit sales – low margins 2nd Hand Unit sales – reasonable margins Service sales – reasonable margins Parts sales – high margins

• Has been improving processes• #3 amongst competitors in Construction Industry• Australian Distributor is subsidiary of global supplier• Floor plan finance for stock


• What are the determinants of future sales? Controllable & Uncontrollable (eg economy, building

& construction)• Is it getting all the service work from all its old

sales?• What impact do warranties have on the sales

process?• Is the global supplier good at honouring

warranty obligations (quick, generous)• Is it located on the right geographic location?


• What are the determinants of future sales? Controllable & Uncontrollable (eg economy, building

& construction)• Is it getting all the service work from all its old

sales?• What impact do warranties have on the sales

process?• Is the global supplier good at honouring

warranty obligations (quick, generous)• Is it located on the right geographic location?


• Is suitable floor plan finance in place?• Can a competitor selling competitive products

buy the distributorship?• If not, who are the logical buyers?


• Is suitable floor plan finance in place?• Can a competitor selling competitive products

buy the distributorship?• If not, who are the logical buyers?

Case Study #3Facts

• Training business – corporate training programsfor staff.

• Turnover $0.6M 50% from the Gov’t RTO program 50% paid 100% by clients

• Profitable• Owner works 3 days/wk• All training staff are contract staff.• Small head office staff.


• Training business – corporate training programsfor staff.

• Turnover $0.6M 50% from the Gov’t RTO program 50% paid 100% by clients

• Profitable• Owner works 3 days/wk• All training staff are contract staff.• Small head office staff.


• Is turnover too low to attract competitive interest?• How many clients are repeat Vs new?• What happens if the Gov’t stops the RTO program?• Is there a formula driven sales process which has a

known conversion rate?• Are there add-ons to increase the value of each sale?• What new products can be added to the sales mix?• What if the owner wants to start again in the industry?• What agreements and non-compete clauses are in place

with the key trainers?


• Is turnover too low to attract competitive interest?• How many clients are repeat Vs new?• What happens if the Gov’t stops the RTO program?• Is there a formula driven sales process which has a

known conversion rate?• Are there add-ons to increase the value of each sale?• What new products can be added to the sales mix?• What if the owner wants to start again in the industry?• What agreements and non-compete clauses are in place

with the key trainers?

Thank you for your time today!

Further Questions?


Thank you for your time today!

Further Questions?

Appendix 1: Valuations

• Business valuations: Asset based Multiple of Future Maintainable Earnings (PE) Discounted Future Cashflow Industry ‘Rules of Thumb’

• All valuation methodologies intuitively take intoaccount risk and return.

• The greater the perceived risk of the future notat least reflecting the past, the greater thediscount.


• Business valuations: Asset based Multiple of Future Maintainable Earnings (PE) Discounted Future Cashflow Industry ‘Rules of Thumb’

• All valuation methodologies intuitively take intoaccount risk and return.

• The greater the perceived risk of the future notat least reflecting the past, the greater thediscount.


• Unless shown otherwise, all other assets being soldhave an inbuilt risk as to the likelihood of the assetgenerating a return equivalent to its historical return.

• When an asset has an extraordinarily high value multipleof current earnings, there is an unstated implication thatfuture earnings will be far higher than past earnings.


• Unless shown otherwise, all other assets being soldhave an inbuilt risk as to the likelihood of the assetgenerating a return equivalent to its historical return.

• When an asset has an extraordinarily high value multipleof current earnings, there is an unstated implication thatfuture earnings will be far higher than past earnings.


• Valuations of future performance factor in: Reliability of historical revenue streams being

repeated year on year Likelihood of future revenue streams being increased Reliability of underlying costs being maintained at

current levels for current revenues Likelihood of additional costs being required to

service higher future revenue levels• The greater the certainty of these, the lower the

risk to the buyer and the higher the price willingto be paid


• Valuations of future performance factor in: Reliability of historical revenue streams being

repeated year on year Likelihood of future revenue streams being increased Reliability of underlying costs being maintained at

current levels for current revenues Likelihood of additional costs being required to

service higher future revenue levels• The greater the certainty of these, the lower the

risk to the buyer and the higher the price willingto be paid


• High PE’s - think Amazon, Google etc in the last10 years and their premium over a normal PE.

• There is an expectation that future earnings willincrease sufficiently so that a realistic PE basedupon future earnings would result in the currentmarket price being ‘fair’ to the buyer, taking intoaccount risk.


• High PE’s - think Amazon, Google etc in the last10 years and their premium over a normal PE.

• There is an expectation that future earnings willincrease sufficiently so that a realistic PE basedupon future earnings would result in the currentmarket price being ‘fair’ to the buyer, taking intoaccount risk.

Appendix 2: Selling & Exit IssuesIPO’s 2008 Review www.ipohome.com

A Lost Year for IPOsIn light of the unprecedented financial crisis, interest in the IPO space all butdisappeared in 2008 and issuance volume sank to levels not seen since the1970s as investors, burnt by sharp stock price declines, refused to put newcapital into the IPO market and are instead waiting for the market to stabilize.This trend negatively impacted the performance of the Renaissance IPOIndex, which saw a major drop in the second half of 2008 after many years ofsignificant outperformance.


A Lost Year for IPOsIn light of the unprecedented financial crisis, interest in the IPO space all butdisappeared in 2008 and issuance volume sank to levels not seen since the1970s as investors, burnt by sharp stock price declines, refused to put newcapital into the IPO market and are instead waiting for the market to stabilize.This trend negatively impacted the performance of the Renaissance IPOIndex, which saw a major drop in the second half of 2008 after many years ofsignificant outperformance.

Appendix 2: Selling & Exit IssuesIPO’s 2008 Review www.ipohome.com


FinancialTechnology

Appendix 2: Selling & Exit IssuesIPO’s 2007/08 Review www.ipohome.com

SPAC – Special PurposeAcquisition Company

Healthcare


Technology

Energy

BusinessServices

Financial

Appendix 2: Size of Deals2008 www.ipohome.com


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