August 2007

Nova finding new ways to help you build value in your business.

All our clients are looking to build a more sustainable and profitable company, many with a view to selling their businesses.

We have a passion for helping our clients succeed.  Since our inception we have consistently strived to find new approaches to help our clients grow and build profitability.  Starting with our Legal Needs Analysis, and subsequently with the development of the Nova Solutions toolkit, we have worked with many of you to develop simple approaches to building value.  It is a reflection of this passion that we are pleased to announce a new strategic relationship with Dr. Tom McKaskill – a world leading authority on building value and developing exit strategies for high growth enterprises.

Who is Tom McKaskill?

Dr. McKaskill is a global entrepreneur, consultant, educator and author, who has established a reputation for providing insights into how entrepreneurs start, develop and harvest their ventures.

His step-by-step planning system has been adopted by venture capital firms to help them screen and manage investments, as well as by business owners to assist them in developing action plans to prepare their businesses for sale. Dr. McKaskill has an active research interest in private equity finance, IPO strategies and acquisition strategies. His approaches to building sustainable profitable ventures and insights into selling businesses at a premium, have gained him considerable respect within the entrepreneurial community.

Moving forward

Nova's core beliefs resonated so strongly with Tom's common-sense approach to building business value that we have arranged to make his materials available to use in a series of structured seminars we will be holding across the country in the coming months. We have also arranged to publish his papers in our regular newsletter and have his books made available to you through our web site. 

This relationship strengthens our ability to provide clients with guidance on a holistic basis as they look to build value in their business. Further information on the upcoming seminar program will be provided shortly and we look forward to meeting with those of you who are interested in gaining a better understanding of how to build value in your business.

Articles this Month:

• Hidden Treasures Too often owners sell businesses ignoring the potential that might excite buyers (by Tom McKaskill)
• Selling Your Business How to prepare your business for sale (by Beth Carmichael & Mark Simpson)

Hidden Treasures (by Tom McKaskill)

Too often owners sell businesses ignoring the potential that might excite buyers.   Many businesses are unable to exploit the underlying strategic value in their operations or are simply unaware that such a value exists. Most firms are focused on what they can do today, and spend their efforts on the parts of their business that are easiest to leverage in the short to near term.

Extra value that may be exploited from underlying assets or capabilities is left unrecognised or untapped. But this may be where the real capital gain on the sale of the business resides. Acquirers are prepared to pay a premium on the purchase price where they can see assets or capabilities that can be leveraged through their own resources. For example, they may be able to open up considerable potential for products in the business they are buying if it has products that complement their own. This can happen if they have a well-developed distribution channel, a large customer base or alliance partners that can utilise the products.

The test of strategic value is simple: Are we able to exploit the potential of this business in a relatively short period? The key to strategic value is in releasing the potential of the acquisition. They may also see how existing products could be used by them to open up new markets or where underlying technologies could be combined with their own capabilities to develop new products for an existing market or to enter a new market. Most businesses are valued on the basis of the profits they make from their current operations. This "fair market value" is usually defined as the value an independent investor would pay for the business, based on the flow of free cash expected to be generated by the business - that is, the value of continuing the business as usual.

The assumption is that the business will continue to be managed the same way and work in the same market. This is fine for businesses of limited potential, but seriously undervalues those that could be leveraged into larger markets by a stronger entity or that could benefit from better funding for growth. Many privately owned businesses are limited by their access to internally generated funds or by the capabilities of their owners.

Most are reluctant to seek external finance as this either puts them at greater risk or dilutes their ownership by having to give up equity. Ascending to the next stage in the development of their business might mean investing in new technology, specialised staff, new plant and equipment or a professional sales force - all very scary to the owner that has a nice, tidy business that is generating a good income. But the business itself may be more than capable of expansion by an injection of more-experienced management talent or by access to the money needed to enter a larger market.

Often there is a gold mine of intellectual property or intellectual capital in the form of patents, unique processes or specialised knowledge lying dormant in the business that is not reflected in the balance sheet or income statement. The business might be sold in haste due to the ill-health of the owner or due to a serious downturn in revenue without these underlying assets ever being noticed. In the rush to sell the business, the owners simply have not taken the time to evaluate the potential of untapped assets or capabilities.

In the end the business is sold and the owners never reap its true value. Business brokers rarely have the opportunity to prepare a business fully for sale to a strategic buyer, a task that can be done only over an extended period. Stephen Harvey of Barclay's Business Services Network, a nationwide business broking service, is often confronted with this problem. He says: "I have seen a lot of businesses over the years where significantly more value could have been achieved in the sale if more time had been spent identifying the strategic value in the business and then seeking out companies that could exploit that value." In some instances, he says, a proper assessment of the potential value and the use of this assessment could have increased the selling price of a business by several times. "But the owners were impatient and simply wanted to get the sale done in the shortest possible time."

The key to unlocking strategic value lies in preparing the business for sale. Instead of rushing to market, the owner needs to take 18 months to two years getting the business ready. During that time, the strategic value within the business is examined in light of how a buyer might exploit it, not how it is being used. The owner needs to answer the question: "Who can make more money out of this business than I can?" Most strategic buyers work within the same industry as the seller and are often working with similar products, services or technologies. Often it is simply that the larger business can readily exploit the potential. So slow down, take a real hard look at where the strategic value lies in your business and take time to prepare it for sale to a company that will pay you a premium for the opportunity to exploit it.

For a complete list of Nova Legal's services in regard to increasing the value of your business or to purchase one of Tom McKaskill's books please visit www.novalegal.com.au

Selling Your Business (by Beth Carmichael and Mark Simpson)

So you want to sell your business?  Your main consideration is probably making sure you get a good price. This involves more than just ensuring your P&L and balance sheet look their best.  You also need to reduce the risks for the buyer.  This means you need to work on the risk, governance and due diligence issues that will create a much more efficient and profitable company.  

As Dr. Tom McKaskill points out in his book, The Ultimate Deal 1, a successful sale is achieved by "cleaning up the business, improving current and future profitability and creating growth potential for the buyer...Owners who fail to prepare their business for sale are giving away significant value."  Essentially, being well prepared for sale involves ensuring that you can meet the demands of a comprehensive due diligence program which will be managed by the potential buyer's professional advisors.

If the buyer's due diligence uncovers any problems, at best, this means incurring potentially significant costs renegotiating third party contracts to comply with the buyer's requirements.  At worst, the buyer could reduce the purchase price or abandon the sale and walk away.  Just as you would prepare to sell your home, you should also prepare your business for sale to show it in the best possible light to a potential buyer. Nova can assist in optimising the value of your business by ensuring it has the appropriate legal infrastructure to protect its key assets and reduce the risk to a potential buyer. It also reduces the costs of completing the sale by limiting the involvement of legal advisers in the sale process.  And fewer lawyers has to be a good thing!
 

Selling Your Business - How Nova can assist

We can identify and resolve issues before the sale process begins.  This allows you to decide if and how to deal with any problems we have identified outside the pressure cooker of sale negotiations.  This means your negotiating position with any third parties is assured. 

Preparing your business for Sale. 

Nova has developed a process to prepare your business for sale.  The process has three components:

1.  An assessment of the company's legal infrastructure;

2. A gap analysis of what is missing; and

3. A training session for key staff on preparation for due diligence and data room management.

Infrastructure assessment

Using a simple questionnaire, we assess your legal infrastructure needs.  The questionnaire, along with interviews with key staff, allows us to assess the viability of key assets including IP, key staff and key relationships.  This assessment is an abridged version of the due diligence that a prospective buyer's lawyers will carry out.

Gap Analysis

Once we complete the infrastructure assessment, we can then let you know where your risk areas are and advise on the best way to deal with those risks.

Training

We then give the key staff who will be involved in the sale process (this may be the business owner alone or a few other senior staff) training on organising key documentation, responding to due diligence questions and managing a data room to minimise management time in the process.  The cost of management time is often overlooked in assessing the cost of the sale.

Timing and Price

For most medium-sized companies, given appropriate attention, this process should take no more than 2-3 days and will be carried out at a fixed price.  If you consider the sale process can take anywhere between 6 weeks and 6 months, the potential cost savings in reducing the involvement in costly advisers' fees alone is obvious.  

If you add to that potential increases in the value of the business for reducing the risk to the buyer and having appropriate legal infrastructure and governance, the benefits of this product are clear.  The objective is to execute the sales transaction quickly by reducing the due diligence and negotiation period involved in the sale.  

Developing a Strategy for Selling Your Business

Of course, dealing with risk is only one part of the puzzle.  To prepare your business for sale, you will also need to develop a proactive strategy that will create value and prepare your business for sale.  Over the coming months we will publish a series of newsletters to assist you in developing such a plan to prepare your business for sale.   

Products to Help You Prepare for a Sale

More Information 

For more information on any of the above please contact Beth Carmichael at Nova Legal on (02) 9004 1400 or email her at beth.carmichael@novalegal.com.au.

Kind Regards,

The Nova Legal & Advisory Team