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Succession, demographics & the global economic crisis

Business exits, succession strategies and private capital raisings are all being brought forward at a rate of knots. Those companies with their house in order (in a ‘sale ready state’) will emerge far better and attract significantly higher valuations. Many will fail. Here are a few considerations:

Succession, demographics & the global economic crisis 11 November 2008

 

The knock on effects of the global economic crisis are in full swing, both in public and private markets.

Business exits, succession strategies and private capital raisings are all being brought forward at a rate of knots. Those companies with their house in order (in a ‘sale ready state’) will emerge far better and attract significantly higher valuations. Many will fail. Here are a few considerations:

The Directors of one business we looked at (food distribution space, $5M EBIT) advised that 12 months ago they (regrettably) knocked back an offer to purchase that was 50% above the valuation they would now be prepared to accept. In another case, the corporate advisor to a well established business that was advertised nationally (niche personal care, $1.2M EBIT), came back to us on two separate occasions and requested that we reconsider putting in an offer either at a higher discount rate &/or on more flexible purchase terms. Each of these instances was pre June 2008 and well before recent market turbulence.

A more current example today is one private company that is struggling to raise capital (debt or equity – it’s not fussed) at a $7M valuation, a year ago it knocked back an investment that valued it at over $16.5M. The increased cost and reduced availability of capital is clearly impacting the valuations of all businesses, as well as the viability of many.

If you’re a private company considering succession (or looking to raise capital for that matter) here are a few considerations.

 
  1. Advisory Team: create a good strategy in collaboration with professional advisors. Yes they’ll charge you (for what may seem like little work) but they should add significant value to increase the sale price or access that urgently required capital earlier.
 
  1. Ownership & Management: should be treated as two separate components, yet the owners of many private businesses implicitly view them as one. Many vendors may no longer be financially reliant on their businesses, but how reliant are their business on them?
 
  1. Timing: The best time to go to market is when revenues and particularly earnings are all trending upward. If one of these takes a hit temporarily it may be better to resolve the issue prior to selling. Purchasers and investors will only value demonstrated results. Ultimately your business is worth whatever a willing buyer/investor is prepared to pay for it at the time.
 
  1. Valuation Ranges: be aware that the value of your business will vary between different parties. Synergistic or trade players, MBO teams and financiers will all have differing views of value. Also implications relating to time, cost, valuation, terms and conditions will all vary depending upon the type of purchaser/investor you pursue.
 
  1. Exit or Entry: think about your business from a buyer’s or investor’s perspective, remembering that your exit is someone else’s entry. Look from the outside in. What risks &/or concerns will an outsider see and can they be easily mitigated?
 
  1. Demographics: there are more potential sellers (aged 45 to 65 years, 24% of the population) compared to potential purchasers (aged 35 to 45 years, 15% of the population). This has important implications regarding demand & supply (hence valuation) for all business owners considering succession in the next decade or so.

As conditions continue to tighten, more businesses are coming to market and valuations are reducing across the board.

Adrian Ness is a director of Succession Capital, a private equity group who has funds readily available to acquire &/or invest in private businesses, whose earnings range between $1M to $5M EBIT.

For more information please visit www.successioncapital.com.au

 

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