Posts Tagged ‘MAXIMISE VALUE’

A study of Australia’s fastest-growing businesses has discovered that they key element for growth is an environment in which staff want to learn and apply new knowledge creatively.

The study, conducted at RMIT’s School of Management, quizzed 253 companies that have achieved growth of between 35% and 600% over the last four years.

“Fast-growth SMEs are the high-power engines of our economy, comprising only 3 to 10 per cent of firms but generating up to 90 per cent of employment growth,” Dr Tan ( the lead investigator ) said.

The significance of what Dr Tan calls “learning orientation” emerged from the study, as many of the fastest growing companies studied had created an environment in which staff are committed to constant learning.

“These businesses know knowledge is power,” Dr Tan said. “It has always been said that learning is the only source of competitive advantage. You can learn from competitors, suppliers, anyone in industry.” Businesses that recognise this empower staff to learn, both formally and from trial and error. Teams are encouraged to learn from members’ efforts, so failures become as learning experiences not negatives deserving of censure.

Dr Tan said the study “Also found that rewards associated with performance do not make employees more market oriented or customer oriented. Money can’t buy creativity.” Willingness to learn, however, can achieve those outcomes because staff who want to learn will pick up the knowledge they need to understand the market and will ensure they have – or seek out – the knowledge to satisfy customers.

Tactics Dr Tan has observed which businesses use to create learning orientation include open question and answer sessions among staff, or adoption of social networking tools like Yammer to encourage collaboration. Physical environment is also important, Dr Tan said, as a pleasant one will stimulate staff to higher efforts.

The research by Dr Tan, Professor Kosmas Smyrnios and Lin Xiong in RMIT’s School of Management showed there was no significant relationship between reward-related human resources practices and learning orientation.

“Benefits and bonuses have their role, but they do not necessarily mean employees are committed to learning or to the goals of the venture,” Dr Tan said.

“In contrast, our study indicated that learning orientation in a firm is only enhanced when high levels of motivation are maintained and employees are treated as valuable resources.”

According to the recently released Smart Company WHK SME directions survey the message simply isn’t getting thru to business owners – only 35.3 % have a business exit strategy !

For at least the last 10 years advisers have been warning of the impending wave of baby boomers looking to exit and hand over their businesses – but it seems business owners have largely ignored this advice. A combination of the GFC causing business owners to hold off selling ( as the market was so bad ) or chosing to remain at the helm during bad times and the reduction in asset values means many business owners are not going to recieve the nest egg they had been expecting.

This means the great wave of exits has probably simply been delayed by a year or two.

Interestingly, a surprising number of respondents who did have an exit plan said they were simply likely to wind the business down when it came time to exit – Hardly a good strategy to maximise value !

I was sadly, not surprised to read only last week in my local paper the story of a family owned business with the owners planning to retire in November and have simply chosen to close the doors despite trading for over 40 years. The story includes the very familiar comment “our son and daughter have worked here for 15 years but they didn’t want to take it on” a trend which has been emerging for the last five years and is typical of family businesses unfortunately.

The owners also state that they have been unable to have a holiday since 1995 and have attended the business every day to feed the fish!

Importantly, the article also recognises business owners fear (often well founded) that whilst they may be able to transition the ownership by selling transitioning the management was more of an issue and may well cause them to have to return to their business – “we are quite passionate about what we do and are wary of people coming in and not being able to support it with the rent money” the owner said “we thought if the new owners failed we would have to come back in.”

Sadly this has led to the decision to close the doors after 40 years retire in November and walk away.

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.

The latest survey covers performance during the quarter to end July 2011 and expectations forward for the rest of this financial year, and is the result of responses from over 1800 business owners – approx 1,400 small businesses and about 400 medium businesses ( more than 20 employees ) . Key findings were:

Business confidence fell further during the last quarter, with confidence now at the third lowest level recorded in the 18 year history of the index.

In line with the drop in confidence, there were also falls in all key performance indicators, wiht strong falls in particular recorded in sales and profitability. The latest fall left the profitability indicator at its lowest level in the history of the index. For the year ahead SMEs were expecting further falls on all indicators.

A lack of work or sales remained the primary concern of SMEs this quarter with a large increase in concern levels. This was followed by the economic climate and cash flow.

Support for the Federal government’s policies fell a further seven percentage points in the last quarter. The key reasons SMEs gave for feeling that the Federal government policies worked against them included the carbon tax and a view that the policies were impacting consumer confidence and spending. Net support has not seen lower levels since the Keating Government.

Confidence was highest in the health and community services sector but lowest in the retail trade sector. Regional businesses were more negative than metropolitan ones about the current state of the Australian economy as well as more negative on where the economy will be in one years time.

In terms of planned activities – 22% of business owners said they wanted to personally work less in the business, 18% said they were looking to seek professional assistance to grow and 17% said they would sell or close the business during this financial year. Interestingly 38% planned to increase their digital presence and 26% said they wanted to introduce to increase their social media activities.