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How to position your business for acquisition

Mark Iles | July 11, 2016
Tech Research Asia Executive Consultant, Mark Iles, outlines how partners can capitalise on the rise of M&A activity across Australia.

There's an old saying, that's been mainly credited to the Emerald Isle but has worked its way around the world, regarding a stranger asking for directions - to which the local response is "well, I wouldn't start from here if I was you".

When I think about the process tackled by business owners as they look to a potential sale of their business this often comes to mind.

After all, if you want to get somewhere, then it's better to start from a place where you have a good chance of reaching your goal.

But just because you want to sell all or part of your company doesn't mean the market is ready to buy; whether that's a trade sale, IPO or a capital raising.

Markets can be fickle and particularly in Australia factors like the USD/AUD exchange rate have a material impact on valuations and business cases for overseas buyers (though currently this is trending the right way of course).

So, if you're thinking about selling your business what are the steps you should be taking?

Preparation

First things first, hopefully you've been thinking about this for a while and 'Exit Strategy' has appeared on the Board agenda at least once.

One of the best exercises you can undertake is to prepare an Information Memorandum (known as an IM), there are lots of sample ones on the Internet to choose from. Larger companies have these prepared by outside parties but there's no reason you can't do this yourself.

The idea is to create a prospectus that any potential suitor could use as a basis for understanding what your business does, how it has performed and what it's prospects are in the future.

Make sure any data you use is 100 percent verifiable and don't go overboard on creating outlandish forecasts for the next 3-5 years' growth - buyers generally pay little attention to sellers' graphs of forecasted sales and will rely on their own analysis anyway.

Also, be careful not to trim costs too aggressively as you head into a potential sales process - it's quite common to trim a little fat in advance of a sale but if you cut too deep it will be noticed and questioned under due diligence.

Valuation

Providing a valuation for any business is difficult due to a number of factors including the type of business, consistency and growth of revenues, customer retention, business track record, perceived risk from external events, strength of competition etc.

The general rule of thumb has always been a range of 3-5x EBIT rising to 7-10x EBIT in a strong market or for companies with a particularly strong market position.

 

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