Exit strategy

The best outcomes for business owners come through careful planning and
preparation

The process begins well in advance Now more than ever it is “Even during the global
of putting up a “for sale” sign. In important for business owners to
this guide to selling a business, consider their succession planning
financial downturn of
Grant Thornton outlines the key options and the future of their 2007-08, growth funds
factors for business owners to equity. remained active,
consider. focusing on supporting
Figure 1: Investments by fiscal year
Timing and the market
their investee
Over the last decade, capital markets 2013
companies through the
around the world saw the tough economic
pendulum swing from one extreme 2012
climate. In recent years,
to the other. Initially awash with
funds primarily accumulated 2011 however, the number
through a decade of economic
2010
of investments has
growth and compulsory declined as a tight
superannuation savings. Then, the
Global Financial Crisis and ensuing
2009 fundraising market has
turbulent economic events 2008 seen fewer new funds
worldwide created an environment being raised to invest in
of uncertainty. 2007
growing businesses: a
Low interest rates and low
yielding traditional investments had
2006 trend also observed in
driven fund managers to seek 2005
the broader private
alternative investment strategies. equity market.”
Whether through expansion 2004
The Australian Private Equity and Venture
strategies of larger corporates,
0.00 5,000.00 10,000.00 Capital Association Limited (AVCAL)
consolidation strategies of private
equity managers or purely direct Private equity Venture capital
investment, this money is finding a
home in middle market privately Source: Australian Private Equity &
Venture Capital Association Limited 2013
owned businesses. Yearbook - December

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Exit perceptions What is the business Improving business value
Business owners are often reticent worth? Most people will paint the house,
about disclosing their long term This is a question close to the hearts weed the garden and fix the broken
ownership plans. of every business owner. gutter before they put their house
Understanding the components of up for sale.
The Grant Thornton International value can steer the owner toward a
Business Report (IBR) 2013 year’s “value improvement strategy” that Business owners ought to undertake
results illustrate globally only 8% results in a substantially better exit similar steps when preparing to sell
of businesses state that they outcome. their business.
foresee an exit over the next three So many owners view their
years, the lowest level since 2008. Perhaps the single biggest businesses as their “superannuation
This global decrease indicates a determinant of the value of a nest egg”. It represents a one-off
reaction to a turbulent 2012 and business is its current and recent opportunity to convert a lifetime of
maybe a reflection of business profit history. It represents the
owner’s views that they may not be effort into wealth. Often the majority
reward to the business owner, and of of the family’s wealth is tied up in the
able to attract the level of interest
or price acceptable to them. The course, the future business owner. business, invariably all at risk and
2013 IBR also found selling to a The second major determinant of highly dependent on a successful exit
competitor is the most likely exit the value of a business is “future
outcome. Clearly a strategy must be
route for businesses in the current risk”. It is an assessment of the
probability that the profit of the set to maximise value. The aim is to
climate. get the business “investment ready”.
To find out more about IBR and business will be maintained or grows.
Factors to be considered in assessing For example, what must be done
to obtain copies of reports and
summaries visit: this risk include: to reduce the perception that the
www.internationalbusinessreport.com business will no longer prosper
• the dependency of the business without the business owner? Hence,
on the business owner what are the implications for the
Figure 2: Businesses most likely to sell
in the next three years • sustainability of competitive management structure, policies and
advantage
procedures, reporting, ongoing
Global • intellectual property
8% innovation and creativity and
• growth and profit trends
ultimately, the drive behind the
Rest of the • business disciplines and
7% business?
world
practices
Mainland
By attending to “future risk”
8% • culture and professionalism
Europe factors such as these, the business
• the market in which the
UK and business operates becomes more mature and will
12%
Ireland usually be in a better position to
Whilst “profit” and “risk” can grow and prosper without the
BRIC 7%
see opposing accountants argue business owner’s daily influence.
North about theoretical value indefinitely,
8%
America Properly executed, value grows
the ultimate determinant of value is
the strategic position of a buyer. exponentially.
Beauty is in the eye of the
Base = percentage of businesses It can take up to five years to
foreseeing a change of ownership over the beholder. Factors such as
next three years
become “investment ready”
economies of scale, complimentary
Source: Grant Thornton International so it is important to start
Business Report 2013 products and markets, market preparing early.
domination or even fast tracking of
growth, can see particular buyers
pay more or less for acquisitions
than an accountant’s valuation.

2
Selling the business Finally, it is the after-tax outcome from all key stakeholders is essential
An Information Memorandum is which matters most. for a successful transition.
the backbone of a professionally The whole selling process is a Concluding the sale
structured exit methodology. procedural methodology structured Once the money is in the bank,
to attract the right buyer who is most business owners become risk
An Information Memorandum is a prepared to pay a good price for a averse, quite understandably.
document which highlights the key business which clearly
value drivers in the business and demonstrates strategic advantage For most of their lives, business
presents the opportunities and through acquisition. owners have risked most of their
challenges in a positive manner. wealth to be in this once-in-a-lifetime
Importantly, it is structured so Some reasons for not position. They know how to run a
prospective purchasers can quickly selling business, but how can they make
and easily assess the strategic • the business is part of the family the transition from a risk taker to
significance of the opportunity and be • an important legacy that of custodian?
able to propose an indicative offer for • best long-term investment Sadly, too many business owners
the business. available get this bit wrong!
This document must be capable • opportunity for the children What does this “pot of gold”
of withstanding a due diligence • do not want the children to represent? It represents the future
process. inherit a lot of cash security, income and lifestyles for the
Armed with an Information • the business is a flagship business owner and their
Memorandum, an investment ready • important for the employees dependents for the term of their lives.
business owner can commence the next • something meaningful to do – It represents the opportunity to
phase of selling... identification of a family pride and heritage pass wealth to the next generation
buyer. • sense of social responsibility to and beyond.
Not surprisingly, in around 60% the community
of cases, business owners already • how can investments be
Transitioning the family business structured to provide good
know their future buyer. It may be a presents the opportunity for returns but mindful of the risk
family member, competitor, a continuity. While the family profile of the family?
supplier or even a client. A list of business owner may have the • how can taxation be legally
known suitors is easily assembled. intention to pass the business to minimised?
Attracting the other 40% requires a family members it is essential to
ensure the skill and motivation of • how can the estate planning be
sales program using mass marketing properly structured to
the next generation. Addressing
and multimedia outlets. incorporate superannuation,
this earlier rather than later avoids
Throughout the process, a assumptions and expectations of the insurance, wills and trusts?
confidentiality strategy is usually incumbent generation. • how can the owner remain
critical. The dynamics of a family in mentally challenged?
Business owners might be wise business presents founders with
to leave the negotiation, unique challenges and an overriding A comprehensive wealth
documentation, due diligence and responsibility to plan for the future management strategy should bring
settlement to the professionals. There – their own, the firm’s and the together all of these components.
family’s. Importantly, like planning for the sale
would be nothing worse than
Undertaking a planning process itself, it should not be left
frightening a prospective buyer for generational transfer involves
away at the last minute when their to the last minute.
both practical and emotional
due diligence reveals falling profits considerations and utilising an
attributable to a distracted business independent facilitator for this
owner. process can help separate the family
and business issues. Gaining buy-in

3
Key contacts
Grant Thornton design exit strategies for business owners to meet their lifestyle, income, wealth and security
objectives. Whether the exit horizon is near or far, the best exit outcomes require careful planning and
preparation. We are here to help.

If you want to know more please contact us…

Adelaide Brisbane Cairns

Dale Ryan Mark O’Hare Doug King
T 08 8372 6535 T 07 3222 0222 T 07 4046 8877
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Melbourne Perth Sydney

Robert Scheiber Mauri Mucciacciaro Robert Powell
T 03 8320 2318 T 08 9480 2105 T 02 9286 5850
E [email protected] E [email protected] E [email protected]

Adelaide Brisbane Cairns Melbourne Perth Sydney

Level 1 Level 18 Cairns Corporate Tower Level 30 Level 1 Level 17

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