Tag Archive for: Business Exit Strategy

What is the true value of your business?

If someone were to ask you today, what is the value of your business, then what would your answer be? And how would you come up with your valuation?

The reasons why you may need to know the value of your business include to develop an exit strategy or sell your business or perhaps to seek out additional finance to expand your business via new products or into new markets. There is no doubt that potential buyers, investors or lenders will require you to justify your valuation of your business.

Yes, almost anyone with an understanding of figures can quantify tangible assets minus liabilities and create projections for future business income, but you know that your business is worth more than simply the tangible assets.

You have built a business brand and product brands and have forged valuable relationships with customers and suppliers. You know your business, your products and your market inside out. And how much is the intellectual property in your business worth?

How can you quantify those intangible business drivers to include them in the final valuation of your business?

By looking at your business in isolation, it is very difficult to put a value on those intangible value drivers and almost impossible to justify your final valuation to other parties, who in their own interests will most likely be trying to minimise the valuation.

This is where Gibsons can you help you via a tool called CoreValue which can provide a value estimate of your business. The CoreValue database contains data from tens of thousands of private business sales and the software will compare the specific details of your business against its comprehensive dataset to create a value estimate.

There are 18 value drivers that the CoreValue software use to quantify the value of your business: Growth, Market Size, Market Share, Revenue, Barrier to Entry, Differentiation, Brand, Margin, Customer Base, Company (e.g. Mission, Culture, Practices), Financial, Marketing, Operations, Customer Satisfaction, Management, HR, Legal and Innovation.

How does CoreValue work?

First, you simply fill in a questionnaire which requests some business details and then asks you via multiple choice questions about the 18 value drivers in your business. Then we will provide you with a report that shows where your business fits, and therefore its value, relative to the thousands of business in the CoreValue database.

But not only will this CoreValue report estimate the value of your business, it will also highlight areas for improvement in your business to further boost the value of your business.

Contact Gibsons and speak to one of our experienced business consultants today about estimating and boosting the value of your business.

Thanks to Steve Bryant from QMI Solutions for providing information about the CoreValue database and software that is included in this article.

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.