Meet the panel
The Panel Q & A
What are the the things you should do to prepare your business for sale and when you should start preparing?
I might start with the timeframe. The general rule that I apply to any sort of preparation is the longer, the better. Now, often I’ll get business owners who sort of fall off their chair when I say three and five years is better, but it really depends on where you’re starting from.
Many business owners decide they want to sell and they don’t give themselves much time to do the preparation. Really, all that does is undermines the potential value they get for their business. So, three years, as I say, is a really good timeframe. As far as the things to prepare, rather than go through a huge amount of details, probably two things I’d suggest that businesses focus on.
Definition and performance
Definition: think about your business as a product. It’s a business in a box that makes money. And that’s ultimately what people want to buy. So, the more definition that that box can have, the better. The systems, the processes, the contracts, the type of IT, the people, the contracts and the market share.
The more that you can define your business in that structure, the easier it is for somebody to that it’s got worth to it. And depending on where you’re starting from, that’s where the three years can come into play very, very quickly.
Performance: there’s always the exception to the rule, but I’m not talking about them. I’m talking about the vast majority of businesses that people want to sell and that other people want to buy. They’re profitable. They’re making money. So, if your business is not profitable then believe me, from somebody who has actually sold businesses for clients over time, bloody hard work.
If you’ve something unique or specific or something along those lines, quite niched, yes, there’ll always be someone out there that may want that. But I’m talking about the general business community. If you’re not profitable and you’re not growing, and your indicators are not showing the right direction, not only is it harder to sell, but it’s harder to sell it for the money that you actually want it for.
So, once again, that three years, depending on where you’re starting from, just gives you a longer period to achieve good consistent numbers. Strangely enough, business owners don’t just want to see, or purchasers don’t just want to see one good year of numbers. They actually want a bit of consistency, so that makes it harder. So, put a good business together, run it profitably, continue to run it profitably, grow it.
Not only will it be worth more when you go and sell it, but it will be a lot easier to sell.
I think the things you need to keep in mind are risk. Obviously, managing risk. Business is about managing and minimising risk. And of course, there’s different types of risk. Financial, operational and legal. So, Stewart’s already touched on one thing, and that’s your documentation. And I’d split that up into two different areas.
One is the external documentation, making sure you’ve got contracts in place with suppliers, proper contracts with customers, distributors, etc. And terms and conditions of trade. I had a client who’ll remain unnamed some time back. Big company, and I got asked to review their contracts. And I said, “Who drafted these?” And the CEO rather sheepishly said, he’d done so himself. So, it does happen with big companies too.
And then, the internal documents. They’re a whole bunch of them, aren’t there? Proper employment or independent contractor agreements. There should be business succession agreements because most companies or businesses aare run through companies or unit trusts. So, there should be a shareholders or a unit agreement in place. And there are various other agreements that it’s ancillary to those or in conjunction with those.
Leases. Some businesses, particularly if there’s a related entity that’s managing the premises, don’t have formal leases in place sometimes. So, it’s important that you have those because buyers, funny enough, would like to be able to take the premises over if they can.
And your marketing materials. You should make sure that there’s nothing misleading or deceptive in there, because there’s a very scary provision in the Australia Consumer Law that basically says that a business mustn’t get involved in misleading or deceptive conduct. It’s as simple as that. And you don’t even have to do it intentionally. So, you need to make sure that those documents are in place. Those are the obvious ones that spring to mind.
Also trademarks and protection of the IP as well. A lot of people seem to think that if they’ve got a business name registered or a company name, that they’re protected. That’s not the case. So, you should obviously trademark your brand and any particular products that have a real value to them as well. For example a brewery may have several different types of beer – they should be trademarking those as well. Also copyright, patents, etc, when they apply.
It’s nice to have a strong online presence or reputation. A good reputation I should say. That’s one of those things that I think people take for granted, that they don’t take care of in the life of their business. With how we work, we like to think of that as online influence, if you like. So, making sure that how you’re talking about your products and your services is what you actually do deliver.
I think there’s a lot of sales posturing that goes on that could be a lot of over-promising, which is what Harvey was just talking about. But also, you’ve got to be harnessing those customer reviews, making sure that you’re not only getting feedback from your customers to improve, but also to build up your reputation.
And that’s on Google sites and the various directories that are out there. We’re a little bit exposed now as a business if we’re not taking care of our online presence. I had a business owner the other day that said, “Well, I’m just not going to set up a review site.” And I said, “That’s not how it works. If you’re not willing to take care of your online presence, then you might as well pack up your business and go home.”
Because we are in an internet age now. You have to take care of that stuff. You have to educate yourself. You have to get the right support. And really, the kernel of all that when you’re getting a business ready for sale, is that you want glowing endorsements online. And real ones. You don’t want to buy fake reviews like a lot of businesses do at the 11th hour.
Well, technology can turn everything to s**t, unfortunately. So, my big scary step for the night is that IBM did some research and said that when it comes time for a merger of two separate businesses, only 23% recover their costs from that merger and 50% destroy shareholder value. So, if you’ve got two businesses, they’re both doing $10 million, making profits of say 30%, and you say, “You know what? I just stick them together, and I’m going to get double, four times the multiplier from synergizing these two businesses.”
The reality is you’ve got a 1 in 4 chance of covering the cost of sticking them together and a 1 in 2 chance of actually losing money, and it happens because the processes and the IT systems cannot be married.
Or you spend a tonne of money to bring everything together, only to realise that once you’ve gone through this process of bringing everything together, the business landscape changes and it’s irrelevant, and you’ve got to go and do a new process anyway. And this is with two profitable businesses that decide to get married.
So, my controversial statement there is that the classic IT due diligence process is broken, which basically is one aspect of you’re doing your checklist. And this aspect is to be able to basically end up with that IT number or whatever it might be. It goes in as an asset line and is a positive or a negative, whereas the problem is, is in the merger of the processes and the associated of technology to actually bring these two systems together.
But there’s also potential there, right. So, that’s also the opportunity, as we all know, in getting it right.
Letting another organisation know you’re on the market is commercially sensitive information. How would you recommend sounding out a prospective buyer at the very initial stages to ascertain interest?
Harvey: First thing is get a non-disclosure agreement in place.
Ian: Are they worth the paper they’re in on?
Stewart: Yeah, correct, yeah.
Greg: Well, I don’t know. I’m for sale. Right? I think the answer is, is that you’re always for sale. And then, you don’t need to flick on a light and deal with those problems. I’m always looking to sell. I’m always looking to buy. And I feel like that covers it for me. What do you think?
Stewart: When I was doing some broking a few years back, we would have a few clients that would literally want to market their business via stealth. Rather difficult to actually market a business for sale without being able to give away who it actually is. So, it is difficult. And I agree.
Stewart: I think that there is one thing to go and market and say, “We decided to go to the market today,” versus, “Hey, for the right price everything can sell.”
Greg: I mean, go to the market. Maybe those who’ve done the IPO or go into least effort, that’s more formal. But I think it’s an ego or self confidence issue that you’re willing to talk to your competitors. So, you’re willing to talk to anybody about anything. And it’s just talk, and then these things can happen. What do you reckon?
Harvey: Well, Ian raised an interesting point about whether an NDA, non disclosure agreement is worth the paper it’s written on. And the short answer is, in the modern day and age once the information is out there, you’re obviously aren’t going to be able to get it back in a hurry. But it does give you a level of security.
Stewart: Is it like having a lock on the front door to keep the honest people out?
Harvey: That’s another bad analogy.
Ian: Yeah. So, what’s the rule? To just maybe not actually share anything that you don’t want people to know?.
Harvey: Well, you can talk, but don’t give them too much information.
Harvey: And a favourite pet hate of mine is entering into heads of agreement beforehand. Now, I’ve spoken to Stewart about this often before.
Stewart: Several times.
Harvey: Yeah. The reason being that they’re generally non binding, but then as soon as you sign one people start saying, “Oh, but it’s in the heads of agreement,” and they tend to be badly drafted by non lawyers.
What are the biggest mistakes you see businesses making when they’re thinking of selling?
Lack of preparation. Honestly, just lack of preparation. I’ve had a few that I’ve looked at. I’m sure that more planning had gone into their Christmas holiday, to the beach, than preparing their business for sale. And that’s where you lose value. Where you miss the detail. You take a business to market and they don’t have their trademarks and they don’t have some understanding of their IT.
There’s one client that I’m working with at the moment more on the succession structure, and it’s a basket case. The IT. I said it to somebody earlier. Their server is 15 years old. Double it’s expected age.
The propriety software which underpins every quote, every sale is about 10 years old and doesn’t seem to be getting any updates. So, from an open market situation, you look at that and think, “Ah, back to that risk bit. Yeah, that might be just a little bit dodgy.”
Can I add on that, because you talked about technology? So, one of the things that I try and encourage people to do is create a technology debt by line item. The concept of a technology debt is, every year you delay in updating or enhancing a system someone’s going to have to pay something, perhaps more, in the future.
You won’t ever show your accountant, but from a business valuation, it’s useful for yourself to have a tech debt line item that you know that you’re offsetting. You’re not paying that $10,000 now that you should, and it’s going to hit you next year. And especially when you come to somebody looking to buy your business, because they will be doing the numbers and they’ll go, “Well, this business is great, but I’m going to have to spend $100,000 on whatever.”
Is every business saleable?
Stewart: I’ll say no because I’ve seen some profitable business not sell because they haven’t been sexy. They haven’t been easy to get the mind around. They’ve had some elements that people haven’t liked. So, yeah, just being profitable is actually not good enough.
Ian: I just wanted to add to that as well. The shame of this is that you don’t get in the head space that you should be for selling your business until someone’s interested in buying.
Ian: And then, suddenly they’re asking you for all this stuff and you don’t have it. You haven’t thought about it, and …
Brenda: Which probably comes back to if you’re in Greg’s head space, which is, “I’m always for sale,”
Ian: Yes, absolutely. And it’s a good head space to be in, because it really starts you thinking, “Do we have up to date systems? Do we have great processes? Can we hand over our marketing engine to somebody else?” They’re all really, really big questions that give you clarity, and really are the questions that you should be thinking about in the day to day of running your business anyway.
Ian: So, it’s a great head space to get in. It’s just unfortunate that you don’t get in there until someone’s already looking at your business, and then you feel like you’re playing catch up. You know, you’ve only got a few weeks to get your ducks in a row sometimes.
Greg: I mean, I don’t know for others in the room obviously, but for me it took 15 years to get into that head space.
Greg: So, I was running a business and I was happy to see how far I could take that business on my own, in my own strength and my own abilities. And basically, I ran out of steam after 15 years. So, if someone had asked me that 15 years, am I for sale, I would have said no. So, yeah. So, I think life stages and maturity, but there’s a point where I felt like … And for me it was around …
Greg: I wanted to know how far I could go under my own steam. I think that’s a part of being a business person. But at some point you will realise I’m willing to share, that the world’s a bigger place than just me, I’m willing to negotiate and talk to people. So, I hit that space about five years ago. And so, then I’ve gone through all those different permutations that we’re talking to, but since then …
Greg: So, basically as a maturity level that I had to get to that point where I was willing to share and develop some philosophies around wanting to work with others. And I did experience that idea of the pie being bigger when I was willing to share. And my slice of the pie was bigger therefore, because I was willing to work with others to collaborate on that.
Greg: So, that’s a very difficult part that you get to. Someone might have started their business like that, but it took me 15 years of stubbornness before I got there in myself. .
Harvey: I think the short, short answer is that most businesses are for sale and it’s about the price. And what people need to realise is that when a purchaser does their due diligence, they’re going to be going, looking at the purchase price and saying, “Well, how much is it going to cost me to rectify that, that and that?” And they’re just going to take that off.
Harvey: And in my experience, most vendors have an unrealistic idea of what their business is really worth. So, the more structure you can put in place of all sorts, the better it is.
Greg: Yeah, totally agree.
Harvey: Stewart, would you agree with that?
Stewart: Yeah. I think the understanding of what it’s worth, I can put together a beautiful report with wonderful calculations, net maintainable earnings and all these wonderful things. But as I’ve always said to every business I’ve ever looked to sell is, it’s only actually worth as much as somebody’s prepared to pay. Full stop. Bottom line. Now, we can put a number out there, and you do need to have an understanding of what you’re talking about or at least what it’s worth.
Stewart: Now, you might want to use that in your marketing. That’s another ploy in itself. But yeah, the market is the market and if somebody doesn’t want to pay, it’s going to be pretty hard.
Ian: And that’s why I’m not sure about your comment, Greg, as far as, “I’m for sale. I’m always for sale.” In my experience, and I’m in a similar area to you. In my experience, I think it’s better to explore collaborations and partnerships with people and just to add so much value that they say, “Hey, what you’ve got is really special and we want that.” I think it’s a better conversation to have.
Greg: Well, I actually mean that when I say for sale- So, I’m glad you clarified it. And this is kind of connected that … Because when I started thinking about this, I don’t think my business was ready. But what I noticed is that parts of my business, other people would want. So, for me, my way forward in this process was to break the business down into little bits and realise that I had valuable bits that other people would want.
Greg: And also, with an attitude of collaboration and the pie being bigger. When I say, “I’m for sale,” it’s really about I’m happy to negotiate on anything. So, for me, I wasn’t looking for an exit as in there’s this working system. I want out and you take everything. I think that’s one way to go. But for me, if you’re willing to break whatever you’ve built into lots of little pieces and negotiate with this person with this piece and this piece, you can actually move transactions and create value for each other on that.
Ian: Well, you find other businesses that way too, which is … Other business concepts, which is a whole other conversation. But yeah.
Greg: I think also there’s a point that Harvey made about the value. And to me, it’s actually the sell value and the terms, which is kind of what you’re covering because yeah, it’s a case of, well, the sell value is only just one facet of it. How that money comes, whether you go with it, what are your next opportunities, depends on who you’re actually dealing with.
Greg: So, yeah. To me, it’s value and terms. So, I’ve been in a situation where I’ve started a conversation looking to buy. And I was so impressed with that business, I wanted to sell my customers to them because I thought they were great. You want to be here for the next 15 years. I don’t. Do you want to take this? So, it’s kind of … That’s what I mean by that attitude of so be flexible.
How you put the value on your business brand and your online reputation?
It’s priceless, to start with. It’s one of those things [ that if you don’t have it in tact, then you may not sell your business. So, it’s a little bit like … It’s the oxygen to your business, actually having a proper nurtured brand reputation, an online presence. But it is one of those intangibles as far as valuing it in a business sale or whatever it might be.
However, if you’ve done it well, it will have an indirect effect on the sales and the numbers of customers that you’ve acquired over the years. If you’re doing your branding and you’re communicating with your customers well, then you should be growing your business through those channels.
So, if you want to sit there and do your spreadsheet with your multiples of profit and whatever old methods that people still use to value to businesses now, then you’ll still be okay because you’ll have done those things well over the years.
Another thought on the value of a business I’d like to add
I had to give up my perceived value of my business. I feel like I couldn’t move anything because I knew that I spent bloody 15 years, 80 hours a week… If I paid myself $100 an hour, I would never get that money. So, for me, my come to Jesus moment was to realise the value is in what the buyer perceives it to be. It doesn’t matter how much I sweat to get to this point to have this conversation, I need to understand what they see as the value.
So, my first transaction was in exchange of equity. And for me, my calculation of value was, “How fast could I get to where I want to be?” So, it was a time equation, not necessarily a money equation. So, I knew that if I gave a certain amount of equity, I could get from where I am to where I want to be in three years as opposed to 10 years if I did it by myself.
And what’s the value that I put on saving myself seven years of my life? That was one of my equation for valuation, was that I wanted to get to a place in three years time. So, anyway, just as a … It’s rather an off ball thing out there.
Are all the things that you do to make your businesses saleable and valuable as possible, are they always the things you’re looking for when you’re going to buy a business?
It’s always in the eyes of the beholder. And I’ve seen a few assets over time, which … seen in isolation, I don’t know why you’re buying it. Well, it was worth something to the buyer because it fitted a niche, it delivered a particular competency, it gave them a skill, it gave them an entry into something. So, yeah, it can be surprising sometimes what someone will pay.
The other part of your question now is to, what are the other things, and I’ll let everyone else have a go, is fundamentally I found that the truth tends to get just a little embellished.
There’s been a few occasions where I’ve worked for a buyer, and emotion is always a wonderful thing. So, if somebody’s looking to sell a business and I see some emotion in the purchaser, we’re fanning that flame. We’re doing everything we possibly can to keep them excited.
On the other hand when I’m working with a buyer, I’m trying to bring them back to earth and cold hard reality, in regards to what it’s actually worth. And somewhere in between is a good meeting point.
Whether it’s a sale or it’s a merger or an acquisition, whatever it might be, this value alignment that you have to find with the people that you’re talking to, if you can’t find that first up before you really get into the finances, then you might end up, just be a figment of each other’s imagination anyway. So, that’s really an important piece. And to discuss those issues upfront.
In addition to what Stewart mentioned, what people need to realise is that one of the reasons that people might acquire a business is to take a competitor out of the market, and they may be prepared to pay top dollar for that. So, you in fact, may get more than it’s worth, which is the opposite to what we’ve been discussing, but it happens sometimes.
Or as you said, a particular niche. An expert in that field, take them either out of the market or absorb them into your business.
For me, it’s always looking for a good deal. So, like the distressed business is an opportunity to have a look at. So, those things are there as well, but I look at that with some compassion so that the owner of a distressed business, how do you help them exit with dignity, exit with something that they can have? But you can make the numbers work because it’s a distressed business. You’re not necessarily looking for the ones making money.
Just talking from personal experience as far as distressed businesses, the thing that I found is that they’re distressed for a reason. And normally, that’s reflective in their technology. Not how their online presence is set up, but their IT infrastructure, etc. And no matter how hard you try in a distressed business sometimes, you can’t revive them.
There’s a reason why they’re bleeding. And I’m going to mix metaphors here, but sometimes when something’s on fire, just let it burn. And I think being discerning in those moments is really important. I’ve been a part of a couple of those who have been acquired by the same group, and I’ve just been looking at it, going, “Why do you buy these businesses? Why am I here again to help sort out the mess?
It’s common for a lawyer to focus on legal protection for their client, and for the accountant to focus on tax avoidance. But to lose sight of the overall commercial goal, which the client’s trying to achieve in a merger or acquisition, do you have any rules or guidelines for overcoming this potential conflict?
Well, lawyers and accountants have got to cross the T’s and dot the I’s, but I think at the end of the day, any decent lawyer and/or accountant has got to realise that they’re there to make it happen for their client. Now, I don’t know how many times I’ve said to the other lawyer in a transaction, “Look, that’s our job. Let’s make it happen. We’ve got a willing purchase and a willing vendor.”
So, yeah. There’s a certain amount of structure, but you’ve got to be practical about it. And that’s where you sit your client down and say, “Look, don’t argue about that kind of thing. Let’s get on with it.” So, lawyers and accountants have got to be practical.
[Greg: Is that a common sentiment, that when you say that to the other lawyer do they agree with you?]
Most cases, yeah. If they’re worth their salt. And I’m pleasantly surprised most of the time. There’s often a bit of posturing early on (Not from my side) but I’ll give you a classic example. I was in this big firm in Sydney recently, and they obviously thought, “Well, I’m dealing with a small practise in Melbourne. I’ll give them a bit of a runaround.”
Within a week we were on first name terms and it was working, because they realised they weren’t dealing with an idiot. So, that kind of thing can happen.
Greg. You’ve got a very interesting approach when you’re thinking about a merger or acquisition in relation to doing small things together to see how it works out. Do you want to talk a bit about that?
I like the idea of joint revenue arrangements as opposed to any sort of profit discussions. And so, if there’s some talk and we think something can happen, I’m very keen to try and find something small that we both have some skin in the game, we can quickly do something together. And to adopt that idea of fail fast is okay rather than trying to make a business deal be protracted because we’re trying to make it work, we’re all professional and we’re going to plan it to the nth degree.
I think doing things quickly and seeing if by throwing these two businesses together, like you spin it off into something new, a safe playground that you both can play in is a great way to win. And if the two businesses get a win in a small scale, when they come to talking about the bigger picture, the conversation is much more fluid if they’ve got success in the lead up to that.
I think that builds on something Ian was talking about earlier, playing in a safe place gives you a really good chance to explore whether the values actually match, because people can say that their business values, life values cover integrity or whatever, but really it’s when the skin’s in the game and you’re actually doing something together that you really discover if there’s a match made in heaven.
Mm-hmm (affirmative). From personal experience again, I suspected that another SEO company was going to be a good fit for us to merge with. And so, I convinced them to share some office space with us. I said, “Save on your rent. Move in with us for a while and see how it works.” We’ve already been contracting some work to them. And that was a really good way of getting to know them, seeing if it’s the right fit.
And then, sure enough, 12 months later we merged. So, I think you’ve got to try before you buy a little bit and say, “Hey, you know what? This could work. Let’s try it in a softer way and go from there.”
Meet the host
CEO and Founder, Synergy48 Group
Brenda has an honours degree in organizational psychology and a Graduate Certificate in training and development and she is an experienced trainer, facilitator and counsellor. She is a firm believer in mutual collaboration combined with a practical, hands on tools, strategies and systems as the most effective way to achieve real results in business.
Brenda has over 20 years of experience training in communication, team work, time management, productivity, organisation and strategic planning in large organisations. She is also the developer of the Business Benchmarking Toolkit used by Synergy48 Group members and clients to identify areas for improvement in their business processes.
Brenda is a sought after mentor, speaker and trainer in the areas of strategic partnerships and networking with a difference. She is passionate about actively giving back to the community. In addition to donating her speaking fees and a proportion of every Synergy48 Group membership to provide microfinance to help women in Malawi to start their own businesses, Brenda has climbed the Himalayas to raise money for Kids Help Line and helped lay a pipeline to supply water to a remote village in Tanzania.