Why would you want your business to be Investment Ready? Well, at some point, you will probably contemplate transitioning ownership of your business to the next generation, sell the business to a third party or look to attract equity capital or debt to achieve expansion plans. In any of these scenarios, the business needs to be Investment Ready to maximise the success of your chosen path.
So now that we’ve established why you need to be Investment Ready, what does that mean in a practical sense? The start of a new financial year is as good a time as any to consider if you’re ready for what the future may hold.
Here are our top 9 items that need attention when you start your journey to become Investment Ready.
- Get your financial accounts in order.If you sell your business or even transition it to the next generation using debt to release some equity a minimum of three years financial accounts will be required. It is vital that the accounts are clear and free of ambiguities, that they relate to business income and expenses only and are consistent in presentation and format. If the transaction value is in excess of $5mil to a third party it may also be worth considering having your accounts audited to provide potential acquirers with an additional degree of comfort.
- Can the business operate under management?If not, perhaps you should think about reducing dependence on the owner, fully documenting operating processes and passing on skills, knowledge and relationships with customers, suppliers and other stakeholders. This will ensure that the business is attractive to a broad range of acquirers, not only owner-managers.
- Establish your business’s value. The price achieved for your business will be dependent on the market and economic conditions prevailing at the time you take your business to market. If you were to sell your business in a competitive environment with multiple interested parties bidding, the price achieved may be higher than if you were forced into a quick sale, for example, due to ill health. Quite often for well-established businesses with stable earnings, a buyer will make an offer for the business on the basis of a multiple of earnings. The two key issues are, what level of earnings and what multiple? Earnings will be based on historical figures, but probably more importantly current earnings and earnings forecasts. The buyer, through due diligence, will be looking to understand the underlying earnings of the business and what level of earnings can be achieved in the future.
- Consider what can be implemented to optimise earnings.There are a number of initiatives that could be actioned to optimise earnings, including ensuring you’re doing as much business as you can for existing customers, are achieving benchmark performance for each division of the business and are not spending unnecessarily on non-profit accretive or non-core operational activities.
- Define what you are selling.It is important for you to be very clear as to what you are selling – i.e. the business or shares in the company. If the business is being sold, what assets are to be included in the sale, and what level of working capital is to be included in the sale? The value of the business includes all the assets including stock, debtors and fixed assets that are employed in the business. The business may be sold with or without the debtors and creditors and it is important to be very clear on this from the start. The ultimate price will be adjusted to reflect any assets or liabilities that do not form part of the sale. The choice of what is being sold may be driven by tax reasons. From a buyer’s point of view it is much easier and significantly less risky to buy the assets, as legal, taxation, employment and other obligations remain with the company. If you want to sell the equity then the buyer will have to carry out significant due diligence and will be seeking extensive warranties from you. These warranties could be up to 100% of the value of the business or more, for a significant period of time.
- Identify your list of prospective purchasers. Who are you prepared to sell to? Do you want to sell to a listed company (will you consider shares as sale proceeds), an owner-operator, a family member working in the business or certain direct competitors? A listed company will have very different requirements to an owner operator, family member or direct competitor.
- Due diligence process. It is important to be aware of what a potential acquirer will look at during the due diligence process and deciding whether to proceed with the offer. These include:
- Financial performance of the business - does the vendor have a good reputation in the market, and with its customers and suppliers? What is the vendor's competitive advantage? What makes it different from its competitors and will this mean it can grow into the future? Who are the customers?
- Balance sheet items a buyer will question will involve debtors, stock and fixed assets. – What stocktake procedures are in place and is stock being accurately recorded in the books? Is obsolescent stock being properly accounted for? Are debtors collectable? Are there special sales terms or discounts in place? Are there special supply arrangements in place that are transferrable? Are proper asset registers kept which match the physical assets? Do the book values reflect market values? What is the maintenance regime for equipment and is this documented? What is the annual capital expenditure for the business and has this been consistent over the life of the business or has capital expenditure been cut back over the last few years?
- Having a well-documented information pack on your business ready for when investment opportunities knock will ensure you seize the moment.
- Be mindful of the amount of commercially sensitive information disclosed during the preliminary phase of enquiry with a direct competitor until there is a high degree of confidence of the transaction proceeding. Confidentiality agreements are important, but be careful.
- Budgets and forecasts with robust assumptions. Budgets and forecasts compared to actuals can establish confidence in your track record and budgets for the future periods can illustrate management intentions. This can demonstrate confidence in future earnings to underpin business value.
- Business plan and marketing plan. These are often useful documents for a buyer and provide a guide as to how the business could be performing in the future using the insights of the current experienced management team.
The journey to becoming Investment Ready shouldn’t be completed in haste, but rather progressively worked on over time to deliver optimal business value outcomes. For assistance to get started to plan for the future of your business contact your usual Hanrick Curran Adviser, call 07 3218 3900 and ask for Tim Taylor, Matthew Beasley, Nathanael Lee or call Peter Maletz in Cairns on 07 4052 7524.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.