Selling? It’s worth spending to match ‘means’ to ‘ends’

Consider bringing in an investor to help re-structure your business before selling to maximise the price. By TOM McKASKILL.

By Tom McKaskill

Consider bringing in an investor to help re-structure your business before selling to maximise the price.

More often than not, the business that you should be selling is not the business you are currently managing. Why is this? Simply because the business you are managing may not be the business that offers the buyer the best potential for future profit.

Your business is built around you; your knowledge, skills, networks and resources. The business that the buyer will manage will be built around their own knowledge, skills, networks and resources. The objective in selling a business is to find an individual or a corporation who can gain more out of the business than you can.

Many businesses have untapped potential or can be better managed and exploited in the hands of better resourced or more knowledgeable buyers. There is nothing wrong with recognising that and using that potential to leverage a higher price.

However, premiums are normally paid where buyers can quickly execute on growth potential in the business. This means that the business itself has to structure itself to enable such growth potential to be rapidly exploited.

Entrepreneurs tend to forget that the value of an investment comes from what it can earn in the future, not what it earned in the past. Thus a new owner who can gain a greater return out of the business is likely to value the business more because of its higher potential in their hands.

In a strategic sale, the whole basis of the sale depends on finding a large corporate buyer who can exploit the underlying assets or capabilities of the acquired business to drive large scale revenue. The reason why large corporations often pay a strategic premium is because they recognise that they can release untapped potential from the business by connecting it with their own large customer base.

The maximum value of sale is thus achieved by identifying those buyers who can best maximise the underlying potential in the business. The current owner maximises the sale price by preparing the business so that those buyers can aggressively exploit its potential.

However, the business today may not be structured appropriately to maximise the sale price in such a deal. Often a business needs changes in its organisation structure and/or in its products to best position itself for maximum sale price.

For example, parts of the business may be making a loss and need to be closed down. The company may have patents filed in one country but not in others. Deep expertise may form the basis of the business’s competitive advantage but may not have been documented. The business may need to be broken up into several businesses to find the best buyers for the individual parts.

If the anticipated increase in final sale price due to restructuring or preparing the business for sale is significant, it is worth bringing new equity investment into the business to allow the business to undertake the changes. Such investment can provide funding for restructuring, preparing for due diligence, identifying and building relationships with premium buyers and for professional services firms to support the transaction.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.