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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.

For emerging businesses revenue multiples are a better guide than profits, notably 'as-a-service' companies where profits are lower in the first few years due to the nature of annuity revenues but the longer term profit growth prospects are strong. In these cases, 1x revenue is a rough guideline.

Ultimately, like everything else in life your business is worth precisely what someone else is prepared to pay for it and strategic fit for a potential buyer will often mean these multiples are ignored as we see in some of the deals typically done in the USA where valuations can rise significantly higher.

One of the challenges with selling an Australian IT business is that local valuations lag behind overseas valuations and one of the best strategies you can employ is to target overseas buyers, especially USA where weakening exchange rates add to the attractiveness.

My advice is to talk to a mix of specialist IT&T advisory companies to get their perspective on valuation - they do deals for a living and will have a good sense of the prevailing market dynamics.

For all the potential sellers out there, be realistic about price if you're serious about selling. Most sellers think their business is worth more than it is and it's usually because of the blood, sweat and tears that have been involved in growing it to this point, except you can't see blood, sweat and tears in a P&L or Balance Sheet.

There's simply no point starting the process if your expectations are unrealistic.

Getting the deal done

At this point you will need to have appointed an advisory company to help you with the process and negotiation, expect to pay a fee of around three percent of Enterprise Value to the advisor, some of which is likely to be retainer based.

You will also need legal representation of course and the due diligence process will be thorough so be prepared. These days it's all done via online data rooms that speeds up the process considerably and the golden rule is a good DD process is a fast DD process.

Make sure you leave plenty of room in your diary to respond to requests because you have to keep the process moving and delays cause problems.

Also, expect buyers to want to talk to some of your customers and get this set-up beforehand and decide whether a deal with a stock component is going to be acceptable to you.

Everyone loves cash but being prepared to take stock in the acquiring company as part of a deal is a big plus point to some purchasers that don't have easy access to cash.

 

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