Posts Tagged ‘Business Valuation’

The latest bizexchange index report on Australian private business value is show some interesting results and highlights the need to keep a close eye on the market for business sales in Australia. Before we analyse the numbers a couple of key findings shed light on key issues for business owners as they prepare for an exit or succession plan, which includes selling their business. The rebound in market sentiment in the second half of 2009 looks like more of an aberration as the net sentiment heads back into negative again. The volume of businesses advertised for sale in June 2011 has skyrocketed to a record high unfortunately at the same time the value of the index simultaneously reached a new record low. The rapid growth in listing volumes is predominantly at the smaller end so for the first time three out of four listings during the quarter have EBIT ratios below two. Also for the first time there are an equal number of listings with and EBIT ratio of less than one as there are with EBIT ratios greater than two.

The premium paid for larger businesses, particularly those in the middle market ($5-$15 million turnover) remain strong. This end of the market is strongly influenced by equity markets with mergers and acquisitions the primary source of buyers. While retiring micro business owners flood the smaller end of the market dragging these prices lower. Over the last 12 months there’s been a steady convergence in the values of business below $5 million in turnover. This reflects the divergences value to businesses seeking private buyers compared to those more likely to be purchased by other businesses and again strongly reinforces the need for strategic exit and succession planning in preparation for sale.

Larger business owners preparing to retire should, if well-prepared, have far more success than those smaller businesses. Australia equity markets are underpinned by the constant flow of superannuation contributions of Australian workers. With the equity raising requirements of the larger Australian businesses readily met by these funds and Australian & international business loans there is a surplus of investment funding. This surplus translates into higher P/E ratios for respected listed companies. Consequently, listed Australian businesses will continue to have the opportunity to profitably finance their expansion by acquiring privately owned businesses at lower P/E ratios and they have themselves. It is this practice which will underpin the value of larger privately owned businesses. Accordingly businesses in the medium and middle market need to actively consider how to increase their appeal as a potential acquisition target as part of their exit planning and succession strategy.

The numbers are also interesting in terms of the middle market businesses – retail trade for example are seeing very low EBIT multiples of 0.87 turnover below 5 million turnover and 1.39 for turnover between five and 15 million, whilst at the higher end property and business services are achieving multiples between 3.35 and 4.12 for larger businesses. Many micro businesses (turnover less than 500 K) are failing to achieve a multiple of one with several industry sectors between 0.58 and 0.92. Again the premium for size becomes lastly important.

The percentage of distribution of listings by EBIT value also reveals an interesting trend with over 24% listed at less than 1, 50% between one and 2, 20% between two and three and only 6% above three times multiple. In terms of business value as a multiple of EBIT the vast majority of businesses during the quarter sat between two and three times multiple of EBIT.

A LATE twist in the bidding war for the accounting software provider MYOB has led to the US private equity fund Bain Capital prevailing in a $1.2 billion deal. A competitor, the British-listed software provider Sage Group, had been leading a pack of rival bidders – including private equity giants Kohlberg Kravis & Roberts and Hellman & Friedman – with a $1.35 billion offer.

It is understood Sage’s bid fell through late last week after falls in its share price – hammered by the broad sharemarket selloff in Europe – meant the value of the MYOB transaction would now exceed 25 per cent of Sage’s market capitalisation. The deal would have required the lengthy and uncertain process of a shareholder vote, which prompted MYOB’s owner, Archer Capital, to look elsewhere and accept a bid worth 10 per cent less.

It is still a hugely profitable deal for Archer. 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. ”We doubled the profitability. We basically achieved the three or four things we set ourselves before we acquired it … and we had a lot of inquiry from potential buyers,” an Archer partner, Peter Wiggs, said, explaining the rationale for the sale.

The deal is understood to have been valued at a multiple of 11.3 times earnings before interest, tax, depreciation and amortisation. MYOB is used by more than 1 million small- to medium-sized enterprises in Australia and New Zealand.

Read more: http://www.smh.com.au/business/archer-takes-12b-for-myob-20110821-1j4pf.html#ixzz1VhQMXDGK

Often we work with clients whose uncertainty about which phase their business is actually in ( or should be in ) – expansion or efficiency – causes difficulty and confusion. One of the most difficult aspects of strategic business planning, especially around succession or exit transition planning, is this aspect of efficiency or expansion. In my view, businesses simply can’t do both effectively – that is you can’t successfully grow and expand whilst building within the business, systemised processes and efficiencies. The two require a different mindset, different focus from team members and deliver vastly different business outcomes. In many cases, where businesses have been able to focus only on expansion they can actually achieve that phase of the business, only to find customer complaints increase, staff turnover becomes an issue simply because they haven’t built any efficiency into the system – there are no structured policies and procedures, the processes are not documented. As the business grows it actually becomes more and more inefficient, this combined with the fact that growth requires funding often causes cash flow and financial difficulties within the business.

A good strategic succession plan must combine and manage timing of the phases between expansion and efficiency and ensure the business is never doing both at the same time. I have one client who has an entirely different management style (for example the agenda at monthly management meeting changes) depending on which phase the business is in. When the business is in expansion phase the focus must always be on sales and marketing – new clients, new contracts, new-product development, new networking relationships, new referral agreements et cetera et cetera. In efficiency phase, whilst we don’t ignore any of these we certainly don’t focus our attention on those areas – our attention must be focused on building systems, documenting policies and procedures and ensuring every aspect of our process is as efficient as possible. The board’s role is to advise the CEO / management team on which phase they should be in and how to transition between the phases over time. Effective management of this aspect of strategic succession planning alone can dramatically improve the business outcome and value.

We have recently revised upward a number of business valuations where over a period of time and some dedicated resources focused on key recommendations from our initial review we have been able to decrease risk areas within the business. Our process identifies 24 areas of potential risk for business owners and we can then identify those that are not adequately managed within the business and make recommendations about implementing the appropriate changes to reduce the risk. The risk reward ratio is important in business valuation and if we can reduce the risk we can increase the valuation. We have several client examples where working with a team over a 12 to 24 month period has added more than $500,000 of increased value into a business.

Some of the key risk areas which produce this kind of reward are reducing business dependence on a key person, locking in the key staff throughout the business via use of employee equity plan and focusing on business financials to reduce risk (often including debt and gearing levels but also often examining product mix and profitability ).

Whilst this project can take several years the increase in sale/exit value for the business can be substantial and provide funds required for retirement or exit of the business owner.