So you have built a business and now it’s time to sell and move on. Or perhaps you are ready to wind down and sell off the business to pay for your retirement. Beware! It’s not as easy as it sounds. Deborah Tarrant reports.
Cindy Luken sold her highly successful specialty biscuit-making firm, Luken & May, to distributor Stuart Alexander Pty Ltd in April 2003 and always had in mind the idea of cutting loose from the company she had established in 1996.
Consequently, after the first five years, she established a structure that would enable it to run without her influence as the brand manager. Apart from high profit margins, keeping stock levels lean and debtors on an attractive, less-than-30-day cycle (factors she believes contributed significantly to the business’s appeal), among her staff of 10, Luken had appointed key people to strategic roles in operations, finance and sales and marketing.
When the initial search for a buyer for her supermarket brand, Bite Me, turned into a full-blown offer for her whole company, she was ready to move.
The appointment of a senior management team was important to being able to take that next step, says Luken, who had outsourced the manufacturing and logistics of the business.
More businesses will change hands than ever before in the next decade. Estimates are that $1.6 trillion of assets will find new owners and many of these are tied up in private enterprise. According to recent surveys, around 40 per cent of current business owners plan to sell rather than pass their business on to the next generation or, effectively, shut up shop and realise the tangible assets.
It’s a mighty shift created not only by the much-discussed demographic bubble of Australia’s ageing population as the baby boomers move on, but also affected by the trend for market convergence across a range of industries. Some sectors in particular, retail, medical services and real estate are already experiencing a dramatic contraction in the number of independent operators as medium-sized and bigger businesses get into the swing of making acquisitions for growth.
More businesses on the market with fewer buyers means that competition for those planning to sell is searing hot. Only the best prepared and the most viable will find a buyer willing to pay the right price in the near future, warn both business brokers and accountants.
The first question for prospective business vendors has always been, What’s it worth?, reports Greg Hayes of accountancy and business advisory firm, Hayes Knight. However, business owners should brace for a series of reality checks, starting with the harshest one, another question: Do I have anything worth selling at all?.
The answer to this may come as a shock to many, because a 2004 survey by CPA Australia showed 52 per cent of owners intending to leave their business in the next five years plan to retire, and half of those will be relying on the proceeds as the primary source of income in retirement. With the current outlook, says Hayes, it’s just as well business owners are optimists by nature.
In a perfect world, a business will have been established with the owner’s exit strategy already in mind. Too few are realistic about the timeframe for selling, says Hayes.
Broker Tony Arena of Business Connection International says it can take five years to prepare and sell a business or an absolute minimum of two. He also says there are still plenty of buyers around for the right kind of business. Those in highest demand today are systemised (though not necessarily franchised) turnkey operations.
As a general rule, a business in saleable shape will be operational and profitable, have well-maintained financial records (and be able to show a bare minimum of three years financial history in a consistent format). In addition, it will carry a significant amount of goodwill, clear systems, and managers or staff with delegated responsibilities.
Eliminating a dependence on the owner, as Luken did, is arguably the most important factor in enabling a sale. Beyond the need to relinquish a hands-on operational role, this means documenting important relationships, special product, or services knowledge.
A business with an infrastructure beyond the owner-operator model can be worth many times more than one that relies on the owner’s know-how, explains Dennis Mattiske of national accounting firm, HLB Mann Judd. Luken’s case is a classic example.
While tangible assets such as stock, plant, and equipment always have a market, these alone do not a business make.
It’s the intangibles the goodwill that will be disputed in any business sale, says Hayes. Goodwill involves the reputation of a business and its brands. While difficult to value, corporate goodwill the factor that draws customers and attracts revenue is highly saleable. The business of goodwill is complex. It comes in differing forms. For example, there is the goodwill associated with being a well-located business that might last only for the duration of a lease. Where goodwill becomes contentious is when it’s the personal kind associated specifically with the owner, which is why focusing on making the business transferable is paramount.
The initial advantage of naming a business after its owner, common to personal service companies such as consultancies, often proves a problem, says Mattiske. It is possible for the owner’s name and goodwill to become synonymous with the product/business, and to pass this on to successors, but it may also be a barrier if the owner’s expertise is too closely associated with the business.
Margot Davis and Nicholas Tuckfield found an eponymously named recruitment consultancy, Margot Davis and Company, was no deterrent when it sold to the new, fast-growing recruitment giant, Talent2. Far from it, what interested the buyer was the Fast Moving Consumer Goods marketing micro-specialisation of the decade-old consultancy with 16 employees. Recognising the value of this market segment, Talent2’s CEO, Andrew Banks, did away with the name and strengthened his business by absorbing the consultants into a specialised division of the Talent2’s Castlereagh Street Sydney headquarters.
A business with little capital investment, what Davis and Tuckfield sold for $1.35 million and an allocation of shares in December 2003 was the intellectual property of their business vested in its employees’ expertise, their connections and relationships, the company’s brand and its database. Customer lists present a desirable asset to buyers.
A set of well-organised accounts and financial documents, which showed clearly the growth of the company since it began also enhanced its saleability, says Davis, who confirms she and Tuckfield had been down the due diligence path with a number of prospective purchasers over the years, before taking the plunge with Talent2.
Cindy Luken also believes the state of her financials speeded Luken & May’s sale. They need to be presented in a way that everyone involved in the sale is speaking the same language, says Luken.
Basic documents to be prepared prior to selling any business include: profit and loss statements; tax returns for the past seven years (if applicable); projected cash flow information; value of assets; service and maintenance agreements; value of debts; leases and other contracts; employment agreements; business registration; plus any special licenses or permits.
Calculating and negotiating a price for a business is rarely fast because it’s no simple matter of agreeing on a global price and writing the cheque. It is usually done on an earnings model based on future profitability, and will come with warranties and indemnities.
In the case of Simon McNamara’s sale of his Viva Juice company to rival Boost last year, even with an eager, compatible buyer in hand, the deal took eight weeks of negotiation from start to finish. It resulted in McNamara accepting a combination of cash and shares in Boost much time was spent negotiating their value plus a role on the Boost Board.
McNamara was lucky because the buyer found him. He was talking to another prospective purchaser when Boost founder Janine Allis swooped in with an offer.
Likely buyers are often competitors or suppliers or are already related to the business in some way.
Where a buyer makes the first approach, a sale may be managed with only the services of an accountant and lawyer. If going to the open market, many prefer to bring in the experience (and added expense) of a business broker to ensure the company is in the right shape for the market, to negotiate the price, or, quite often, because psychologically they have already moved on, suggests Arena, who has been involved in the transaction of more than 1000 businesses.
Putting the right price on a business first up is crucial, not only for the return to the seller, says Arena. Overpriced businesses (and most owners don’t take a realistic view of their business’s value), will sit on the market for too long.
Confidentiality is another reason for engaging a broker because the knowledge that a business is up for sale can destabilise customer and supplier relationships and put competitors into overdrive.
In Luken’s case, a broker recommended by her lawyer helped by providing an external view of her business, identifying likely buyers, guiding the sale through the escalation from sale of brand to whole of business, and by creating the strategies necessary to nail the sale. However, the six-months-long process still required considerable time and commitment on Luken’s part, including compiling a detailed PowerPoint presentation on the operation and its strengths. While happy with her outcome, she recommends vendors negotiate their terms upfront with a broker, so each party’s responsibilities are clear.
With the distractions and focus required to successfully sell a business, keeping it operating optimally during a volatile sale process can prove challenging for those who have not fully extricated themselves from management responsibilities. At what point should employees and managers be informed of the intention to sell?
Tell them as soon as possible, suggests Arena. The damage can be extensive if trusted employees find out independently. Inevitably, the uncertainty about whether they will maintain their roles and fit in with a new culture needs to be managed.
Within hours of finalising the sale of their business, Davis and Tuckfield assembled their consultants to announce and explain the change. They presented the compelling vision for a strong, attractive future with a larger, dynamic firm and everyone was reassured they still had a job. The result was that all staff but two who chose to opt out of the recruitment field completely moved with the business to the new owners. (Davis and Tuckfield used a similar tactic with clients, explaining that the only noticeable differences should be a new phone number and the benefit of interstate offices.)
Informing staff early is not only for their peace of mind, it makes sound business sense. If considering selling, it’s wise to lock in key staff with incentive plans, advises Hayes. Industrial relations issues also need to be covered off, including new employment contracts, transfer of long-service leave, holiday and sick pay. The risk of constructive redundancy if employees are required to do things differently by the new owners should also be considered.
Accustomed to running an open and honest culture, Luken admits she found it hard to keep the possible sale of her business from employees in its earliest stages, when told that the element of surprise for staff would be tempered by the knowledge it had always been the plan.
Handover periods for both owners and key employees are commonly written into sale contracts and Luken, who has only recently left Stuart Alexander after renegotiating to shorten her original agreement to stay for three years, moved across with other key employees (confidential agreements prevent the numbers being revealed).
Tuckfield and Davis did the same, although as recruiters they are quick to point out that if an employee does not like a new environment, no contract will be sufficient to make them stay. The trick in helping people through the transition is to be open-minded and respectful. Most people have some aversion to change, says Tuckfield.
Preparing your business for sale
- Select a minimum number of key people to advise of proposed sale to minimise work disturbance and concern regarding job security.
- Discuss with key customers and suppliers the reason for the sale/take steps to ensure continuing business relationship for incoming purchaser.
- Review all agency/supply/distribution agreements and ensure they are current/signed.
- Ensure all leases (premises, plant, equipment, vehicle, computer software, etc) can be transferred to new owner.
- Collect/arrange for payment by slow paying debtors.
- Prepare a list of employees/calculate and agree holiday, long service and sick leave entitlements.
- List all deposits that will be transferred at sale date.
- Prepare for clean stocktake/get rid of old stock.
- Calculate the portion of all expenses that will be pre-paid at sale date (vehicle registrations/insurance/lease payments, etc).
Source: Graham Connolly FCA AFAIM, Managing Director, Family & Private Business Advisors Group. www.businessmentoring.com.au
Cindy Luken was the passionate and inspirational force behind Luken & May. Cooking was always a pleasure to her, from her early days of making chicken noodle soup on her candle-powered German stove through to catering for Prince Charles & Princess Diana’s Australian Bicentenary feast. Eating good food from recipes from around the world has played a large part in Cindy’s life. In less than four years, the business grew to make over 50 biscuit varieties packaged in more than 80 different ways. Distribution covered the major cities across Australia, as well as customers in Japan, Singapore , and New Zealand.
In 2003, Luken & May’s brands were sold to Stuart Alexander, Sydney , Australia , a 120-year-old family company whose business is building brands.