Employer of Choice – Expanding on the Basics

Business Success: The Human Factor (Part 2 of 6)

If you missed part 1 of this people management series, you may like to start with: ‘Become an Employer of Choice’.

The various human resource management issues detailed in part 1 of our HRM series for employers are consistently found throughout businesses in the Small to Medium Enterprise (SME) sector. Business owners are rightly concerned about the impacts upon their business as they are very serious.

One of the keys to business success is employee engagement and alignment.

Staff Engagement = Motivation = Performance = Productivity = Profitability

EMPLOYER OF CHOICE – Expanding on the Basics

An Employer of Choice is an organisation that outperforms its competitors in attracting, developing and retaining talent through innovative human resource management initiatives.

As noted in the previous article, the foundations to becoming an employer of choice are Effective Staff Selection, Induction, Performance Management, and Employee Exit Procedures. But, there is much more!

The Second Step – Expanding on the Basics

Effective Communications – Create Pathways to Success

Good communication creates engaged and aligned employees who work effectively and efficiently together. The human resource management processes listed above (and described in part 1 of this series) provide a framework of communication between the manager and his or her team, so necessary for human success in any business. However, communication can’t stop there.

Effective Meetings – Aligning Individuals and Teams

Meetings can burn resources and waste money like nothing else on planet Earth. Managed well, they can be very effective.

  • Meetings must have a clear purpose that is clearly understood.
  • Meetings must be two-way, everyone has input.
  • Meetings must be effective and professionally run:
    • Set agenda.
    • Minutes taken and reviewed.
    • Meeting chaired.
  • Meetings must have accountable outcomes where action results.

If a meeting fulfils the above criteria, it can serve a practical purpose and engage and align staff in the process. They can also strengthen and build relationships within teams and across teams.

Meetings are necessary for a number of reasons:

  • Toolbox/Team Meetings to mutually understand and address team issues.
  • Safety/Environmental/Quality Meetings to mutually understand and address safety, environmental and quality issues.
  • Interdepartmental Meetings to mutually understand and address interdepartmental issues.
  • Vision meetings where the company vison is shared with staff.
  • Sales Meetings to review and strategise business development.
  • Management Meetings to review performance and strategise and implement the strategic direction of the business.

Meetings are an essential and effective way to communicate and ensure that teams are engaged and aligned in specific areas of the business which are relevant to individual and team roles in the organisation.

Effective Day-to-Day Goal Setting and Feedback – Fine Tuning for Success

Performance Management in human resource management provides a framework for managing goals and expectations based around personal objectives of employees and business objectives. However, business is dynamic and ever changing. Supervisors and managers must practice setting, reinforcing and correcting performance to short-term objectives to reinforce and/or modify behaviour and consistently develop individual and team performance. These simple people management skills applied diligently, skillfully and consistently, will help build high performance teams in your business.

Sound simple? Yet in the current business environment where sourcing and retaining the right people is so difficult, managers and supervisors all too often don’t apply these basic human resource management principles.

You’ll be amazed at the results if you do apply these basic principles. And if you need a hand, talk to an experienced business consultant.

The next blog in this series is ‘Employer of Choice – Rewards and Recognition‘.

Become an Employer of Choice

Business Success: The Human Factor (Part 1 of 6)

Is your business successful and profitable?

Are your people productive? Or are they costing you money?

One of the keys to business success is employee engagement and alignment.

Engagement = Motivation = Performance = Productivity = Profitability

The Human Issue

Human resource management issues are consistently found throughout businesses in the Small to Medium Enterprise (SME) sector. Owners are worried about, even afraid of, the impacts upon their business. The signs are always there and, in many cases, the impacts upon the business are very serious.

What are the signs that point to possible people issues or human resource management issues?

Business owners or managers will often make statements like:

  • If only my staff would do their job.
  • I need to manage tasks; otherwise I get problems.
  • If I don’t do it, it doesn’t get done properly.
  • If only they cared as much as I do.

Staff, meanwhile, often make statements like:

  • I am not happy working here. They don’t care about me.
  • This could be a great place to work, if only management would listen.
  • I don’t understand what is required of me.
  • I want to work in a dynamic team environment.

All too often these statements, and others unspoken, never get addressed, with inevitable results:

  • Overworked owners and managers
  • Disengaged and unproductive staff
  • Good staff leave and poor staff stay

This leads to serious issues within the business:

  • Poor customer service
  • Poor quality products and services
  • Safety issues and incidents
  • Unhappy customers
  • Poor sales
  • Unproductive staff
  • Waste across all areas of the business
  • Conflict in the workplace
  • Poor profit performance
  • And, at worst, business failure.

But it is never too late to act.

BECOME AN EMPLOYER OF CHOICE

An Employer of Choice is an organisation that outperforms its competitors in attracting, developing and retaining talent through innovative human resource management initiatives.

This is more than just creating an attractive place for employees to work, it needs to be an integral part of the corporate strategy that can result in a higher level of performance and productivity in the workplace, greater stability, stronger customer loyalty, high employee satisfaction and loyalty and ultimately, higher profits.
The key question is HOW?

The first step is to implement effective human resource systems and processes in your business.

Effective Selection – The Raw Material for Success

Set the core values and behaviours that you expect in your employees, and the core skills, the must haves, for each role. Develop recruiting standards based around those core skills, core values and behaviours. Then develop recruiting processes that ensure you bring people into your business people who reflect those core values and possess the necessary core skills. Use interview techniques and adhere to an unrelenting policy that you will not hire anyone who does not possess your core values or the necessary core skills.

Effective Induction – Start the Journey to Success

Induction is not just about Health and Safety briefings and introductions. It is also important to set the tone for the new employee and develop induction processes that ensure new staff understand your business, your expectations of them and that they feel a part of your team. Defining roles and responsibilities and building expectations within a role is often forgotten as new staff enter your business. This is pivotal to setting standards and activities for every new employee in your business.

Effective Performance Management – Maintain the Journey to Success

Invest in an effective Performance Management System and ensure your employees are clear about what is expected of them. Link your expectations to the goals and objectives in your business plan to make your business vision more relevant to your people and help them understand why it is important, and keep everyone accountable to those goals and objectives. Review performance against these agreed objectives and revise these objectives regularly. This process provides a two-way feedback framework for every employee and ensures that issues and resources are reviewed and addressed and each staff member is engaged and aligned by positive interaction with his/her manager or supervisor.

The techniques are simple but very effective and, remember, great people love performance management processes. They provide focus and feedback which engages your employees and aligns their performance to business objectives. Great people will thrive in that sort of environment.

Effective Exit Procedures – Refine the Path to Success and Become a Learning Organisation

Constructive feedback from exit interviews can clearly define any problems that you face in attracting and retaining the right people. Effective exit processes are essential to learning how to improve the management of your most important resource – your human resources, your people. If people leave then find out why and act to improve the organisation from the knowledge you gain from the process. This is the essence of a learning organisation.

Skills Development and Training – Provide the Tools for Success

Skills are an integral part of any role within your business. Unfortunately, skills are not always defined clearly for each role within the business. Defining and then assessing skills regularly with each employee provides a framework for the business to evaluate skill needs across the business, within departments and importantly for each individual. This provides the structure to build people development into the business culture and engages staff with a commitment to developing their skill levels with obvious improvements in business performance emanating from that process. Of course, for this to be successful, there must be a commitment to staff training.

Sound simple? Yet in the current business environment where sourcing and retaining the right people is so difficult businesses all too often don’t apply these basic human resource management principles.

You’ll be amazed at the results if you do apply these basic principles. And if you need a hand, talk to an experienced business consultant.

The next blog in this series is ‘Employer of Choice – Expanding on the Basics‘.

Raising Capital for Small Business

Most entrepreneurs and small business owners have a need at some stage to raise capital in order to realise an idea or expand their current business operations.

The first port of call is normally the traditional source of finance – the bank.

But most banks are usually reluctant to lend to small businesses without the security of property – often the business owner’s home. It is very difficult to get banks to lend on the strength of the business opportunity if it is in its start up or early development phase. Financing start-ups is basically not what the banks do.

There is a fundamental difference between the business of mainstream banks and venture capitalists. The bank wants to provide loans that are relatively secure, on a long term basis. Business investors and venture capitalists want to put money into something that will provide an above average return and then get out.

It is important to understand the differences between the various types of start-up and venture finance, and to understand what potential investors are looking for and how to approach them.

We often hear it said that the Australian investment market is conservative and will not back the creative and entrepreneurial talent that exists in business. Without wishing to debate that proposition one way or the other, it is fair to say in defence of the investors that they are often presented with propositions that would not inspire anyone to part with their money. Research has shown that only 0.12% of deals that get put in front of venture capitalists actually attract funding.

To improve the chances of successfully attracting finance for your business start up or business expansion, there are a number of things that you as the promoter of the business should consider and address.

First, ask yourself, what is the stage of development that the business has reached? It is very difficult to attract other people’s money when your business is still just in the idea stage.

The most common mistake business promoters make when looking for funds is they do not look at their proposition from the point of view of the investor.

Investors are exactly that – they invest for a return, they are not punters. Nor are they entrepreneurs who want the thrill of developing a good idea. For them, developing the idea is a means to an end of achieving a return on an investment.

So, if there is no cashflow, there is no business, and the chances of attracting business investment are slim. In these very early stages, the only place that money is likely to come from will be the promoter’s own assets, or family and friends. The other alternative is to look at the various state and federal government grants available to assist with the very early stage of development but there are not many of these either.

Once the idea starts to turn itself into a revenue generator, it is at the stage that it might be able to attract some seed capital. This would typically be in the range of $100,000 to $300,000 and come from an individual investor or business angel. It is still fairly speculative from the investor’s perspective, but if the investor can see that the idea has merit and has a chance to become a good business, they may put money into it. This form of finance is often by way of a loan rather than equity and will be at an interest rate commensurate with the risk. The investor in this scenario will probably only invest an amount that he or she is prepared to lose and is not likely to put in anything at all if the promoter does not have their own money at risk.

The next stage of development for the business is where it has become established and has the potential to expand. At this point, it can start to look for venture capital which will typically be in the range of $2.5 to $5million. The venture capitalist is only interested in investing in a business that will deliver a return and will not back something based only on the potential of an idea.

This is a critical point that business owners need to understand. While the entrepreneur is focused on the potential of the technology or product or service, the venture capitalist is really interested in the quality of the business and the management.

The venture capitalist wants to know who is going to be responsible for his or her money and how will they achieve a return for him or her.

If the business survives these early stages and continues to develop, it will reach a point at which it becomes attractive to the mainstream banking industry for long term debt finance and possibly public listing if it needs to raise further capital.

All of this suggests a few things that a business owner who is seeking capital should take into account.

1. Do it in stages

Even if the idea or product has the potential to change the world as we know it (which many entrepreneurs passionately believe their pet project will do), it is better to start by trying to attract a smaller amount to get it off the ground, rather than the amount required to take on the world.

2. Present the pitch from the perspective of the investor

The investor will want to know how much is needed, what he or she gets in return, when does he or she get it and how and when will he or she exit. (A typical venture capital supplier will normally look to exit the enterprise within 5 to 7 years). Of course, the investor will also need to be convinced that the business has a good chance of succeeding and thus deliver the promised return.

It will require a fair amount of homework to produce:

  • A business plan that shows an effective business and revenue model. It needs to demonstrate a quantifiable need in the market that the business is capable of fulfilling. It should also show how the business compares with competitors on relevant industry indicators and the sensitivity that the projected outcomes have to key assumptions.
  • An investment summary and business valuation model together with an exit strategy.
  • A strategic marketing plan that demonstrates exactly how the potential will be turned into reality. The plan must address the value proposition of the business and the branding strategy that will deliver above average profits.
  • Evidence that there is adequate protection of any intellectual property involved.
  • Evidence of a management team with the credentials and credibility to deliver the result.
  • A clean ownership structure where the assets of the business are clearly distinguishable from the assets of the owner.

All of the above will need to be available in two forms:

  1. A brief presentation that will capture the attention of the investor and answer his or her critical questions.
  2. A detailed set of documents that will stand up to the scrutiny of the third party that the potential investor will inevitably engage to carry out due diligence on his or her behalf.

Remember,  the investor is highly unlikely to slash his or her wrists if an investment gets away from them because it was poorly presented. There is always someone else waiting outside the door to pitch the next opportunity.

 

Here is a checklist of things to consider for small businesses looking for funding.

1) What stage of development is the business at?

STAGE OF DEVELOPMENT TYPE OF FUNDING REQUIRED
i) It is a new product or idea with potential. Self-funding, family and friends, government grants.
ii) It is starting to generate a cash flow. Self-funding, family and friends, government grants.
iii) It has a consistent cashflow, the potential to grow and needs $100,000 to $300,000 to go to the next level. Seed capital from private investors and business angels.
iv) It is self-sustaining and profitable with a positive cashflow and requires $1 million to $5 million to continue growing. Venture capital from private equity firms.
v) It is a substantial company with strong asset backing that needs a large amount of money for further growth. Debt finance from an investment bank or commercial bank. Partial trade sale or private equity placement through an investment bank. IPO.

2) If the business is at stage (iii) or beyond, ensure the following are in place:

  • A business plan that details the business model, demonstrates a viable opportunity and contains competitive bench marks.
  • A strategic marketing plan that demonstrates exactly how the revenue and profitability targets will be achieved.
  • Evidence that the intellectual property is adequately protected.
  • A management team with the know how to deliver the plan.
  • Evidence that the business owner or promoter has a serious financial interest in the venture.
  • An investment summary and business valuation model.
  • A viable exit strategy.

Having an awareness of what investors are typically looking for and doing your homework ahead of time will significantly increase the chances of you successfully attracting funding for your business venture.

 

 

Managing Organisational Change

Organisational change programs to improve business performance are increasingly common yet notoriously difficult to implement. Successful change management depends on management persuading employees to change the way they work, a transformation staff will only accept if they can be persuaded to think differently about their jobs.

CEOs can make things easier if they determine the extent of the change required to achieve the business outcomes they seek. They can choose from three levels of change:
1. Companies act directly to achieve outcomes without having to change the way people work. For example, divesting non-core assets to focus on the core business.

2. Employees may need to adjust their practices or to adopt new ones in line with their existing mindsets in order to reach, say, a new bottom line target. An already ‘lean’ organisation would encourage staff to look for new ways to reduce waste.

3. But what if an organisation can reach its higher performance goals only through changes to the way its people behave across the board?

Suppose the organisation can only sustain a competitive position by fundamentally changing its culture. The collective culture of an organisation is the aggregate of what is common to all of its groups and individual mindsets. Therefore, such a transformation would entail changing the minds of all the individuals within the organisation.

4 Conditions for Changing Mindsets

Each of these conditions is realised independently, and together they add up to a way of changing the behaviour of people in organisations by changing attitudes about what can and should happen at work.

1. A purpose to believe in – what’s in it for me?

Employees will alter their mindsets only if they see the point of the change and agree with it, believe in it, at least enough to give it a try. Staff must understand the role of their actions and believe that it is worthwhile for them to play a part.
For staff to buy in, they must be able to see and relate to the benefit for them – the WIFM (What’s in it for me?). The WIFM will get more traction if it can be presented on an emotional as well as a rational level.

2. Reinforcement systems in tune with the new behaviour

Change management experts agree that reporting structures, management and operational processes, and measurement procedures (i.e. setting targets, measuring performance, and granting financial and non-financial rewards) must be consistent with the behaviour that people are asked to embrace. When an organisation’s new behaviours are not reinforced, employees are less likely to adopt change and new behaviours consistently.

3. Employees must have the skills required for the change

Many change programs ask employees to behave differently without teaching them how to adapt general instructions to their individual situation. Adults cannot learn merely by listening to instructions; they must absorb new information, use it experimentally, and integrate it with their existing knowledge. This means we cannot teach everything there is to know about a subject in one session. Instead, break down the formal teaching into chunks, with time between for learners to reflect, experiment and apply new principles. Large scale change only happens in steps.

4. Consistent role models who ‘walk the talk’

To change behaviour consistently throughout an organisation it is not enough to ensure top level managers are in line with the new ways of working; role models at every level must ‘walk the talk’, with consistent underlying values informing their behaviour. Behaviour in an organisation is deeply affected not only by role models but also by the groups with which people identify. Role modelling must therefore be confirmed by the groups that surround them if it is to have a permanent or ‘deep’ influence (most teenagers can tell you about this).

SUMMARY

It is neither easy nor straightforward to improve an organisation’s performance through a comprehensive program to change the behaviour of employees by changing their mindsets. Nor should it be attempted without first exhausting less disruptive alternatives for obtaining the desired business outcomes. Sometimes tactical moves will be enough; and sometimes new practices can be introduced without completely re-thinking the organisation’s culture. But if the only way for an organisation to reach a higher level of performance is to alter the way people think and act, it will need to create the four conditions for achieving sustained change.

The Value of Mentoring

How do you know you are doing well in your role? How do you know you are leading and managing your business in the best possible way to achieve your goals? Who do you turn to when you are having trouble making a decision or don’t know how to solve a problem?

If major problems arise in your business that you cannot address on your own, or you wish to take your business in a new direction and need a hand then consider seeking out the management expertise of business consultant. But what about the day-to-day issues of leading and managing, who do you turn to?

For many managers, and especially the business owners, the answer is normally no one. You forge ahead doing the best you can with the information, experience and know how you have. Again, we go back to those questions above. How do you know you’ve made the right decision for the best result?

Investing in the development of your employees and yourself is beneficial for both the individual and the organisation. One of the simplest methods to provide employee development is through the concept of mentoring. Mentoring can be both formal and informal and is often a learning exercise for both the mentor and mentee.

Investing in the development of your employees and yourself is beneficial for both the individual and the organisation.

Could mentoring have a place in the human resource management of your business?

The process of mentoring usually involves a more experienced person discussing issues and circumstances with a less experienced person to help them find techniques and practices to address their problems and opportunities. The caveat is that the mentor does not ‘tell’ the mentee what they should do. Instead, the mentor asks the mentee the right questions to enable them to find the answers or remedies themselves to successfully address the problems they may be facing, thus increasing knowledge and confidence.

In essence, a successful mentoring relationship is based upon trust and the understanding that the mentor will support the mentee whilst also challenging the mentee to learn and grow. The mentor shares with the mentee their experiences and know how for the purpose of this growth.

Now, if you don’t have a mentor, is it time for you to find one?

 

Reviewing Financial Performance

Put Your Financials to Work in Your Business in 4 Simple Steps

 

STEP 1: Decide what you need to know

Financials – Business owners and managers need accurate and timely financial information to empower their decision making.

You at least need to know the answers to these questions:
• How profitable is my business?
• How much can I borrow?
• Can I pay my bills as they fall due?

Decide what measures you need to have in order to feel comfortable about the performance of the business and put reporting processes in place.

Key Business Measures – Business owners and managers need to know the key numbers that drive the performance of their business. Find out what they are, and MEASURE THEM. They are the heartbeat of your business.

STEP 2: Measure what you need to know

Financials – Produce a Profit/Loss Statement, a Balance Sheet and a Cash Flow Statement regularly.

Key Business Performance Measures – Measure the heartbeat that drives the performance of your business.

STEP 3: Understand what you need to know

Empower yourself with information and understanding about your business. Review your financials and your key business measures regularly.

STEP 4: Act on what you have learnt

Make informed decisions and take action based on the understanding you have gained about your business. Ensure constant improvement of your business.

Outcomes for your business

• Well informed business owners and managers
• Good, pro-active decisions based on accurate and timely information.
• A culture of constant improvement
• A profitable business

Creating Brand Names

Creating a brand name for a new product or service often consumes a large amount of time, perhaps more time than warranted. We try to be overly creative and clever and sometimes come up with answers that are only meaningful to the company – not the customer.

In fact, it can be very helpful to seek advice or opinions from outside the company, whether that be to utilise the expertise of a business marketing consultant, and/or request feedback from prospective customers.

The key thing is to get the strategy right and let the clever creative stuff come later. Once you can say what the brand name is and why the name was chosen, you can provide that information to a graphic designer to translate into a logo. When assessing the logo, consider whether it is consistent with the marketing strategy of your business rather than if it uses your favourite colour.

Branding needs to fit the product or service and make it stand out from your competitors, engage customers and be consistent with your business marketing strategy.

A few things to consider when creating brand names:

  • Articulate the brand promise and company positioning so that you can test your ideas back against them
  • Embody logic in the name. It should indicate or refer to the business you are in
  • Start with some words that are relevant to the brand and extend the list using a thesaurus
  • Using a name that is already famous in another context can be memorable
  • Start with a letter that is early in the alphabet – there will be times when your name is listed or ranked alphabetically
  • Make it easy to say and spell
  • Internationalise the spelling
  • Word combinations are memorable. Try different combinations from your list
  • Use of mythological figures can be useful
  • Avoid initials and acronyms
  • Avoid numbers and hyphens
  • Check that the domain name and trademark are available before making a decision.

Once you have created a list of possible brand names, rate your preferred 3 to 5 brand names on a scale of 1 to 10 against the following criteria:

  1. Is your first impression of the brand name strong?
  2. Does it sound / look good?
  3. Is it easy to read / pronounce / spell?
  4. Use it in a number of sentences. Does it feel right?
  5. Are quick associations positive?
  6. Does it relate to the brand promise / company position?
  7. Does it sound credible?
  8. Can it work internationally?
  9. Is it memorable?
  10. Is it able to be registered as a business name and is the domain name available?
  11. Does it make you feel nervous? (low score is better)

Creating a brand name and developing the overall branding of a new product or service requires more than just clever ideas. Branding needs to fit the product or service and make it stand out from your competitors, engage customers and be consistent with your business marketing strategy. If you follow the guidelines above, you are well on your way to developing a brand name and product or service branding that will strategically position your brand and your business in the marketplace.

 

Grooming Your Business For Exit (Part 2)

How to get the maximum value when selling your business

In Part 1 of Grooming Your Business for Exit, to assist in your business exit planning, we provided a checklist for grooming your business for sale and considered the option of a trade sale. In Part 2, we look at other options for you to evaluate for your business exit strategy.

Stock exchange listing

Floating your business on the share market through an initial public offering (IPO) may get a higher price for your business by tapping large, liquid equity markets but comes with considerable costs and risks.

IPOs suit companies that:
• Have existing managers and owners who wish to stay involved in the business
• Have high growth and need additional capital for expansion and acquisitions
• Need to motivate and attract managers and directors
• Wish to raise their public profile
• Have a significant capitalisation to ensure appropriate attention of institutional investors (preferable to have a market value in excess of $50 million after the float).

Should I float my business? Advantages and disadvantages of IPOs
Pros Cons
Owners of companies in hot or fashionable sectors can exploit the high valuations offered by the public markets, for example, the late 1990s technology boom. IPOs are costly and public companies face ongoing expenses for listing and regulatory compliance.
High profile and strong brand-name companies can exploit their public recognition to charge higher prices. Loss of privacy and constant scrutiny by the market and media.
Provides access to capital markets for further fundraising to support growth. Constant market pressure for short-term performance and exposure to market volatility.
Allows owners and managers to retain financial and leadership stake but provides a liquid market when they wish to exit. Potential loss of control of the business.
An IPO does not provide an immediate exit as the vendor is required to maintain a significant stake after flotation and is subject to timing restrictions on sales.

Private equity

Management buy-outs and buy-ins (MBOs and MBIs) are valid sales strategies with considerable advantages, including investment flexibility and the ability to protect employee interests.

In an MBO, the company’s executive team and outside financiers purchase your stake, while in an MBI, an outside management team leads the purchase. In both cases, most of the funding is provided by a mix of bank debt and private equity from a third-party investor (refer to the box). This means the management team does not need to have great private wealth to participate. As a rule of thumb each executive contributes 1 to 1.5 times their gross annual salary.

How Management buy-outs (MBOs) and Management buy-ins (MBIs) are funded

The buyout of a $20 million company would typically be structured as follows:

Management $1.0 million
Private equity finance $9.0 million
Bank debt $10.0 million
Total $20 million

Although managers contribute just 5 per cent of the funding, they will typically receive further equity through their compensation package as an incentive to grow the business for the benefit of all investors.

MBOs and MBIs best suit relatively stable businesses with consistent low-risk growth opportunities, which fit the investment and lending profiles of private equity investors and banks. Banks and private equity financiers are unlikely to finance riskier high-technology or high-growth companies.

A major attraction of private equity is the flexibility it permits in how much you sell. You may choose to maintain an investment stake, for example.

An MBO or MBI may suit your company if it:
• Has competent managers with a track record of delivering profits and growth
• Is an attractive business that has been groomed with reasonable growth prospects
• Has a sound growth strategy
• Operates in a mature industry or sector.

Is an MBO or MBI right for me?
Pros Cons
Fewer confidentiality concerns as you are selling your business to managers and third-party financiers rather than competitors. Company requires a sound growth profile and strong management to attract third-party investment.
Sale is a seamless transition for employees, customers and suppliers. Unlikely to match the price generated by a trade sale as synergy gains are not factored into the transaction.
Company retains its identity and independence. Private equity investors ultimately seek a return on their investment when they exit the business via trade sale, public listing or refinancing their investment.
Rewards your management team (and potentially all of your employees) for their loyalty and efforts.

Whether you are making a clean break or are exiting by stages from your company, selling a business is not only about getting the right price but also about managing the change in your lifestyle. Keep your personal goals in plain sight as you run through the options and develop your business exit plan.

 

Grooming Your Business For Exit (Part 1)

How to get the maximum value when selling your business

Getting the best price when selling your company is a little like selling a property or vehicle – you should develop a business exit strategy and groom your business before you exit and consider who will make the best potential buyer. With forethought and business exit planning you can attract more purchasers and maximise the sale price.

Smoothing out the Risks

Identify the risks new owners might perceive in your business and manage them. This will enable you to cast your net more widely for potential buyers and increase their perception of your business’ value.

A company’s value is determined by a simple equation: earnings x multiple = value. The multiple is the variable you are trying to influence through grooming and is a function of perceived growth and perceived risk. Although it’s likely to take some time, a business exit plan and grooming your business will help to reduce risk and increase the multiple variable.

A checklist for grooming your business for sale

Being able to demonstrate the following will maximise your business’ sale value:
• You as the owner are not crucial to the business’ continued success.
• Specific industry experience is not essential for potential buyers.
• Clients and suppliers are not inextricably tied to the current owner.
• The business has appropriate management, operational and information systems.
• Key staff are in place and are stable.
• Intellectual property can be preserved and transferred.
• Market position is stable.
• Legal and contractual arrangements are tidy.
• Past performance is credible.
• The platform is right for growth and a profitable future.

Even if you are not ready to actually exit the business, when you have a business exit plan in place your business will run far more efficiently and you will be in a position to choose the level of involvement you want to have on a day-to-day basis.

Who will Buy? Options for Exiting Your Business

Thinking about the best potential buyers for your business and the way you sell your business is an essential part of the grooming process and developing your business exit strategy. There are three main ways of selling: trade sale, sale to management or stock exchange listing.

Trade sale

Selling your company to a competitor or complementary business is often the best way to maximise its value for reasonable sales costs.

Benefits: Trade buyers are often willing to pay a higher price as they understand the standalone value of the business and may pay extra for potential synergy gains by linking your company with their operations. These might include cutting costs by sharing back-office functions and opportunities to increase sales by selling your products in wider markets.

Risks: Trade sales generally require the release of confidential information to prospective buyers, which may be too risky for some sellers. Purchasers may also wish to change the business fundamentally. For example, potential buyers may want the business merely for its customers or brand name and have no need for its management or employees. You may be forced to decide between the highest price and a lower one that protects your employees.

There are two main ways of conducting a trade sale: contestable sales or exclusive discussions.

A contestable sale gives the vendor greater control over the sale by identifying the keenest buyers and introducing competition, but comes with a risk that confidential information may be leaked to the market. It involves a search to identify all potential buyers, the release of selected company information to determine the level of interest, followed by requests for bids.

Exclusive discussions involve speaking to a single potential buyer and tend to be the result of an opportune approach by another company. They offer less risk of leakage of confidential information and may require less effort, but may generate a lower sale price.

Selling your business: a contestable sale versus an exclusive discussion

Contestable sale Exclusive discussion
Wide-ranging search to approach all potential buyers Negotiations with a single buyer
Competitive auction allows the vendor to set the agenda on price, process and terms Less competition so fewer sale options and lower potential price
Acquirers can succumb to deal fever and bid up the price Less structured process that may require reduced time and effort
Greater risk of information leaking to the market and employees, which is disruptive if the sale is not finalised Greater confidentiality with a lower risk of information leaking to the market and employees

Grooming Your Business for Exit (Part 2) will look at other options to consider in your business exit plan.