Many business owners only find out what PPSR means during the critical late stages of a transaction. The process to clean up a company’s PPSR is straightforward, and preparing early reduces the likelihood of the transaction being delayed while frustratingly waiting for a third party.

What is the PPSR and why is it important in the sale of a business?
The Personal Property Securities Register (PPSR) is where lenders and businesses register their security interests over business/company assets in relation to credit terms extended to the business.

When a business/company is sold, the transaction is usually priced on a cash-free, debt-free basis, where any transferring cash or debt is adjusted for. Clear title to all assets, free of encumbrances, needs to be provided at completion.

Security interests registered on the company PPSR are encumbrances that need to be managed. The process is generally straight forward, however it can take some weeks while waiting for third parties, so it’s important this isn’t left to the last minute.

How to “clean up” the company PPSR
A PPSR search can be run for a nominal fee, and legal advisors involved in the transaction will run at least one during the process.

In consultation with legal and M&A advisors, sellers should review the PPSR list and split into three categories:
• Old charges relating to paid out loans, previous suppliers etc. – it costs banks money to remove a PPSR charge so in many cases they only do so if requested. Sellers should contact any in this category as soon as possible to remove the registered interests.
• Charges that relate to ongoing supply arrangements – Seller should nominate these for lawyer to include as Permitted Encumbrances in the transaction documents. Provided the buyer agrees, these encumbrances stay in place to enable continuity of trade.
• Charges relating to loans that can only be paid out with settlement proceeds – these should be nominated and the Seller/lawyer to check bank requirements early to ensure the interest can be removed with effect from completion of the transaction.

Early preparation is key – a clean PPSR is a simple step that increases the likelihood of a deal completing on time. DMA’s process includes a step to prompt clients to act early to clear off any redundant PPSR items.

Author, Blake Davis

The financial statements of a business rarely tell the full story. Reported earnings often include personal benefits, one-off items or structural decisions that make sense for the current owner but distort the true, sustainable profit of the business.

This is why normalisation adjustments are so important. By adjusting the historical earnings to reflect the underlying, sustainable, ongoing profitability of a business, they help establish the true maintainable earnings which is the number that ultimately drives valuation.

Why Normalisations Matter

Business owners often operate their businesses in ways that suit their personal circumstances but can significantly distort the profitability of the business. Personal expenses, over/under owner remuneration, one-off or abnormal costs, non-market property rent or strategic decisions suited to the owner’s situation may all suppress or inflate the earnings that buyers will use to value the business.

Proper normalisation provides a clearer view of the genuine maintainable earnings and positions the business for the strongest possible sale outcome for all parties.

When normalisation adjustments are done thoroughly and transparently, both buyer and seller benefit. The seller demonstrates the true value of the business and the buyer gains confidence in the sustainability of earnings.

Common Types of Normalisation Adjustments

When preparing a business for market, DMA reviews the financial statements in detail to identify adjustments across a number of areas. Common examples include:

Owner-Related Items

• Working and non-working owners’ remuneration (adjusted to market rates)
• Owners’ personal expenses (vehicles, travel, etc.)
• Salaries, superannuation or consulting fees paid to family members not working in the business

Non-Recurring or Non-Commercial Items

• One-off legal or accounting fees
• Unusual or abnormal bad debt write-offs
• Transaction costs associated with the sale
• Spending with no commercial benefit (Sponsorship, donations, discretionary expenses)

Accounting or Non-Operating Adjustments

• Depreciation and amortisation (to be replaced with capital replacement provision if using EBIT)
• Building write-offs
• Finance costs, interest, dividends
• Gains or losses from the sale of non-operating asset

Property and Leasing Adjustments

• Market rent corrections where property is owned by the vendor
• Internal rent or intercompany income
• Lease payments requiring reclassification or capitalisation review

Other Operational Adjustments

• Bank guarantee charges
• Borrowing expenses
• Hire purchase charges

Each adjustment contributes to a more accurate reflection of the business’s earning capability under new ownership.

How Adjustments Influence Valuation

Small adjustments can have a large impact on enterprise value.

For example, on a 4x EBITDA multiple every $100,000 of normalisation adjustment affects the enterprise value by $400,000.

If reported EBITDA is $2 million but normalised EBITDA is actually $2.5 million, the business may be worth $2 million more than initially expected. These differences can materially affect both buyer and seller outcomes.

DMA’s Approach to Normalisation Adjustments

At DMA, we recognise that the normalisation of the financial statements is critical to achieving optimal transaction outcomes.

Our approach involves a comprehensive review of financial statements well before a business goes to market, identifying and documenting every adjustment with a complete audit trail.

This rigorous preparation ensures that when we present a business to potential buyers the normalised earnings position is defensible, transparent, and credible. By proactively addressing normalisation before due diligence begins we eliminate surprises, reduce negotiation friction and position our clients to capture the full value their business deserves.

Whilst those in M&A readily talk about their successes, the reality is that not every business gets sold.

The reasons are many and varied, and they hold the key to what owners should do if they find themselves still on the shelf after a year or so of being on the market.

Although there may not necessarily be anything wrong, usually reasons can be found in one or more of the following areas:

1. Is something wrong with the business?
2. Is something wrong with the price?
3. Is something wrong with the way it is being marketed?
4. Is something peculiar about the industry the business is in?
5. Is it still too early to expect a result?

To help owners analyse their situation, here are some possible areas to explore under each of the above headings and suggestions as to what can be done about it.

Only 20% of all of the businesses listed for sale ever sell*

90% of all of the people who begin the search to buy a business never complete a transaction*

These US small business sales benchmarks* would apply equally to the Australian small business market, and to a slightly lesser extent, to larger businesses.

The reasons for these atrocious statistics are many, but include the industry’s over-reliance on passive web-based marketing and the under-utilisation of targeted B2B marketing.

It is for these reasons that we have invested heavily over more than 21 years and over $5M in our M&A database, so we can actively target strategic buyers for each business. This allows us to achieve for our clients the best possible success rates, well above industry averages and substantially better than 80% of all clients taken to market.

In fact we won’t take on the responsibility of selling a client’s business unless we can identify and target substantial numbers of strategic buyers for that business (how to do that is explained below).

What could possibly go wrong in M&A?

Imagine if every single action you ever undertook in M&A resulted in immediate and positive outcomes.

Without the right tools, M&A can be a massively wasteful process for everyone involved. Even at its most efficient, with the right tools and a successful outcome, the M&A process may be only 10% efficient and 90% waste. At its worst, 100% of all activities could be wasted if there is no resultant deal done.

Imagine if every business for sale was investigated by only one buyer. The perfect match! No wasted effort, no dry gullies, no unproductive marketing. Just ‘tap and go’ with ‘The Buyer’.

Yet even with the perfect process, the product you are selling (the business itself) is imperfect and things can be wrong or go wrong, leading to a potentially wasteful process with an unhappy ending.

No matter how good the M&A Advisor and processes are, if the client’s business performance goes down, everyone goes down with the ship!

Putting business performance aside, the list of potential waste generators in an M&A process is practically limitless. Here are some examples of the pitfalls and how to avoid them:

Buyers may:

• Investigate hundreds of businesses without buying any of them.
• Target businesses priced beyond their financial capacity.
• Not take the time to find out their financial capacity before starting to investigate businesses.
• Not know what they are looking for or how to find it.

Solutions for Buyers:

• Decide on their target market profile and confirm their financial capacity BEFORE starting to look for a business. If you don’t have your own agenda, you’ll end up being carried along by those that do.
• Instead of wasting time sifting through opportunities randomly, engage in a systematic search of ALL businesses matching the target profile, rather than limiting only to those that are currently on the market. More than half of all business owners will sell if approached by or on behalf of genuine purchasers. This is because most businesses where the owners are willing to sell are not actually on the market and owners are attracted by the thought that a genuine buyer will allow them to short-circuit the potentially wasteful open M&A process.

Owners may:

• Engage M&A advisors who have no processes, knowledge or marketing capability.
• Try the DIY approach and end up in a mess.
• Not take the time to prepare properly, and therefore not optimise their financial outcome.
• Engage the wrong accountants or lawyers, disrupting or sabotaging the sale.
• Not obtain quality tax advice and end up paying more tax than necessary.
• Not be fully committed to the sale and pull out at the last minute.
• Not be properly briefed on how extensive the process will be, including due diligence.
• Not have adequate records, financial integrity or formalise commercial arrangements.
• Set too high a price and miss out on selling to those who could afford it, if it were priced realistically.

Solutions for Owners:

• Research and engage the right advisors, performing their own due diligence on who to engage to assist them.
• Ask a trusted advisor.
• Perform a google search of the prospective advisory firm’s [NAME] + [ACCC] (for Aus only). Some high profile business brokerages will show up as being renowned marketeers through that very simple check.
• Apply criteria such as these: https://divestmergeacquire.com/partner/#member-firm.

M&A Advisors may:

• Try and take short cuts and fail to market the business adequately. This article compares the various ways to market businesses: https://divestmergeacquire.com/sale-process/how-to-market-and-sell-strategic-businesses/
• Not properly qualify or advise clients, to ensure their expectations are realistic.
• Not check whether the owner has received proper tax advice and know the after tax outcome for a given price.
• Not prepare a comprehensive Information Memorandum so buyers can properly assess the opportunity.
• Invest/waste copious amounts of time manually researching possible targets.
• Target the wrong markets or not target any markets at all!
• Source and interact with a large number of responses and expressions of interest from buyers before finding one or more willing to proceed.
• Not properly qualify buyers for financial capacity and/or suitability to operate the business.
• Invest copious time and money and not sell the business.

Solutions for M&A Advisors:

• Be on top of your game. Be part of a professional organisation or network with proven systems, processes, documentation, training, resources etc., such as our own  M&A advisory network: https://divestmergeacquire.com/partner/#member-firm
• Properly market opportunities to identify and target the right buyers.

Everyone may invest time and money on the process, to find:

• There is some legislative, legal or commercial reason why the business is unsaleable.
• The business performance has taken a dive and is now not attractive to either buy or sell.
• One or more key employees or customers leaves at the 11th hour, or potentially worse for the buyer if it happens just after the transaction.

The list of what can go wrong in M&A is endless.

Having the right M&A team, advice, processes and resources are essential to optimising outcomes….and beating those odds!

*References: 

1. “Industry Statistics Every Buyer Should Know”, by Richard Parker, published in BizBuySell in alliance with Wall Street Journal

2. “The Business Reference Guide”, by Tom West 

3. “How to Plan and Sell a Business”, Jim Stauder