Maximise the Value of Your Business

Craig West

Did you know?

51%Of business owners plan to use their business

as their primary source of funding retirement

43%Aim for a lump sum and a third expect an

ongoing income stream

The average age of a family business

owner is 56 years.

61%Would seriously consider selling if

approached.

Baby Boomers – the 18 year wave

Since 2008, almost half of business owners over age 50

have delayed their retirements due to the GFC.

If you turn 50 today, your life

expectancy is now 32 more years.

31%of retired business owners do not

have an adequately funded retirement.

Why Business Succession and Exit Planning?

55% of all business exits are due to death, disability,

bankruptcy, receivership,liquidation or simply closing

the doors.

Covey says “ if you want to have a successful enterprise, you clearly define what you’re trying to accomplish…. the extent to which you begin with the end in mind often determines whether or not you are able to create a successful enterprise.”

Australia’s mid-range market of companies, with revenues ranging from $10 million to $250 million are actually the biggest contributors to our economy .

27,000 businesses.

3.2 M full time jobs.

Generating 33 % of total revenue and

accounting for 1 in 5 dollars borrowed .

Business Survival Rates – 2008/09Exit %7.6%

7.1%

9.9%

19.5%

TOTAL

Non-employing

Micro/Small

Mid-Range

Big Business

15.4%

Total Number of Businesses Exiting the Market: 319,867

Business Succession and Exit Planning

Combining the Business, Financial and Personal goals of business owners to design and implement a strategic exit.

Stage 1: IdentifyStage 2: ProtectStage 3: MaximiseStage 4: ExtractStage 5: Manager

Stage One:Identify Value

Financial Analysis

Non-Financial Analysis

Benchmarking

Total income per fee earner

Net profit per fee earner

$- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000

$269,858

$88,894

$41,592

$25,595

$384,352

$80,477

$63,969

$50,224

$251,971

$162,002

$48,676

$34,431

Income KPI's

High Turnover Firms

High Profit Firms

This firm

Due Diligence

Checklist of all vital information:

• Financials, tax returns, BAS.• Legal – licenses, leases , employment

agreements.• Policy & Procedures / Systems.• Intellectual Property – patents, trademarks.

Stage Two:Protect

Structure Review

ASSETS

RISK

Decrease Risk

Non- financial analysis

Owner dependence

Reverse due diligence

Advisory board

Key people

What do you want from your business in 5-10 years?

Stage Three:Maximise Value

1. Exit options

2. Job vs. Business

3. Boutique or Scale

4. Expansion or Efficiency

5. Decrease risk

6. Improve earnings – 5 * 5 * 5

7. Ownership Thinking

Strategy

Income vs Equity

“The proper man understands equity – the small man, profits”

Confucius551 – 479 BC

Maximise Value

Job vs. Business

Can you leave your business for days, Weeks, months?

How can you add value to your business?

Adding Value

Efficiency or Expansion

Not sure which level to pull or which switch to touch?

The 5 x 5 x 5 ProcessIncreasing Business Profit & Value

How does it work?

5% improvement in three key areas of your business

EARNINGS

Gross Profit + 5%

Reduce Expenses – 5%

Increase Sales + 5%

Here’s an example:

Secure Funding

• Many plans fall over at this point• Age & Financial situation?• Internal succession funding• Equity Partner / Investor

Did you know that over 72% of Gen Y want to own their own business…

but not on their own!

Ladder to Equity1. Income

2. Incentive – commission

3. Profit Share - % profits

4. ESOP – Equity

5. Control / Management

Peak Performance Trust

A structure to allow employees to think and act like business owners by matching the performance of the business with their ability to build equity.

Peak Performance Trust to fund:

• Profit share based on performance• Profit used only to fund purchase of

business by same key employees• Employee retention• Improved performance and increased

value

Stage Four:Extract Value

Strategic Sales

"Price is what you pay Value is what you get "

Warren Buffett

1 + 1 = 3

Strategic Value Drivers

August 2011 – Archer accepts $1.2B for MYOB

The acquisitive private equity fund bought MYOB in February 2009 for about $500 million, and then boosted earnings by stripping out costs, raising prices and aggressively growing its customer base.

The deal is understood to have been valued at a multiple of 11.3 times EBITDA.

MYOB is used by more than 1 million SME’s in Australia and NZ.

Siri wasn’t made in Cupertino. It was actually acquired in a deal rumoured to be worth close to $200 million.

It only took only one phone call to turn Siri's Dag Kittlaus's life around. Before the call, he was the head of a Silicon Valley start-up and afterwards, he was a multimillionaire working with Apple.

Sale to a listed company

ASX – PE ration (multiple)

Private to Public Arbitrage

Historical ASX average 13.73 x

Private companies average 2.5 x

The value gap is called “private to public arbitrage”

Listed companies have a 22 year high in CASH

Offshore buyersThe total value of transactions increased 35% over the

previous year to US$736 billion.

8.8 * EBIT average

AUSTRALIANBUSINESS

PTY LTD

$500K Profit EX

ITTRADE SALE

@ 2 x = $1 million

STRATEGIC SALE @ 4 x = $2 million

SALE TO LISTED CO @ 7 x = $3.5 million

To achieve a higher sale price, it’s much smarter to focus on HOW to sell and WHO to sell to, rather than trying to increase profit.

Net proceeds is the important $

CGT – small business concessions.

Structures – who owns assets – before and after

Other costs - legal, accounting, other fees.

Equity Matrix

100% owned

20% owned

Stage Five:Manage Value

Strategic Financial Projections

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Revenue

Revenue - Dept A Revenue - Dept B

0

5

10

15

20

25

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Headcount

Headcount

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Profit / Dividend

Net Profit Dividend

0%

10%

20%

30%

40%

50%

60%

70%

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Margin / Div Ratio

Net Margin Div payout ratio

Successors Exit Options

Smooth transition

Incoming CEO or Partners

Gradually increasing involvement

Smooth transition

Existing CEO or Partners

Gradually reducing involvement

Strategy for successful succession:

systems / processes

Communication Strategy

• Implementation Success

• Shareholder / Key Management Communication

• Buyer Communication

• Staff Communication

• Client Communication

Case Studies

Client Case Study:Real Estate

Real estate office in NSW

Combined commercial office and residential sales : Central Coast

3 owners

Not in a rush to exit

Business Value approx. $2.4 m

14 employees

Client Case Study:Outcomes• Implemented Peak Performance Trust

• Engaged and motivated 5 key staff with equity plan

• Reduced risk – staff retention

• Restructured

• Asset protection & risk management

• Tax and CGT advice

• Wealth outside business structure

• SMSF to hold appreciating assets

• Risk minimization

• Insured for unplanned events

Recent Typical Project:Insurance Brokers

• 5 month time frame

• 3 existing partners, one potential, two possible

• 5 year plan to sell down

• Accelerate sale by partial sale to VC / Private Equity

• 18 months of ongoing coaching/consulting

Outcomes

• Pre-documented sales programmed over 8 years

• Maximum Equity Value for outgoing shareholders

• Motivated Staff – with a predetermined program to transition

- Ladder to equity

• Recruitment / retention tool

• Accelerated thru initial sale to Austbrokers

Client Case Study:Manufacturing

C-Mac GM Steve Grylak, with the national award for best ESOP for SME’s / Succession at the Employee Ownership Conference and awards dinner last Thursday 10th May. C-Mac has bucked the growing national SME trend to wind up on owner retirement (The Exit Generation Needs Help – SMH 19 Sept.2011) with the introduction of an employee owned share plan ( ESOP) offered to all its employees. The engagement of employees as owners has already seen an 18 % hike in productivity at the plant.

Client Case Study:Clearwater Filter Systems

Sale of a family owned private company at 9.5 times earnings to JWI.

Key Factors:

• Listed company as buyer.• Offshore buyer .• Strategic sale – expansion from NZ to Australia.• 5 year exit strategy.

Client Case Study:Sydney Software Business

• 60 year old owners - focused on reducing involvement and gradual sale.

• Peak Performance Trust involving 8 key staff.

• GM now running business – “semi retired” owners.

• Business Value now over $6 Mil.

• All other assets separated and protected.

• “truly a good story of transitional management”

Strategic Advisory

At start of engagement ( August 2011 ):

• Heavily reliant on the three owners• Owners frustrated at staff disengagement • Unclear about the vision and future of the business• Owners goals - semi-retire while continuing to grow the value of their business • Owners personally exposed to potential liability

Strategic Advisory

Key Actions:

• Overall strategy & vision defined• Improved people management & communication• Ownership Thinking implemented – move towards a business of business

people• Non-owner GM appointed to take the business to the next level and reduce

the reliance on owners

Strategic AdvisoryOutcomes:

• Staff understand and are aligned with the vision and • Management and staff are clearer about what’s expected of them• Staff are in the loop of what’s going on in the business through monthly company-wide

information sessions• The two owners who are closest to their planned retirement age have appointed and are

grooming their successors• All employees have been educated in business ownership, are now receiving information

about the performance of the business and will soon have a self-funded incentive plan to replace their ‘christmas bonus’

• Less ‘me’ focus and more ‘we’ thinking in the culture: phasing out entitlement and bringing staff on-board to a culture of purpose, visibility and accountability

• Employees are sharing the insomnia and stress of running the business

What Next?

Further information on our website:

www.successionplus.com.au

Complete feedback form to be added to our newsletter

Arrange a free 90 minute review

Craig West1300 665 473

cwest@successionplus.com.au

Visit www.successionplus.com.au

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