When preparing to sell their businesses, business owners often ask should we set a deadline for offers?’
This is a good question, and this one decision can make or break your sale process.
In this video, we’ll discuss factors to take into account when deciding which way to go, and offer my recommendations after running hundreds of transactions on both the buy and sell sides.
Setting the sale price is a critical step when preparing your business for sale, with a massive impact on the sale outcome.
This video runs through the factors to consider when deciding what price to set for your business.
When selling, business owners and their advisors need to decide whether to set a price, or market the business without one (ie. EOI)…
There are advantages and disadvantages of each, and choosing the wrong approach can cost you a LOT of money.
In this video we’ll run through when you should consider each approach, and why.
Why, Who for and How?
Due Diligence (DD) is the name given to the process whereby someone undertakes an appraisal of a business to assess its underlying financial performance and commercial viability. Consider it as an audit of the business.
A necessary step in virtually every business acquisition process is to conduct a due diligence review of the target business. This may be conducted pre or post execution of a business or share sale/purchase agreement.
Buyers of medium sized businesses are usually more experienced and better organised than the sellers. The buyer may make regular acquisitions. In contrast, the seller may only ever sell one business and never buy any.
A seller’s lack of experience and preparation may decide the success or otherwise of the sale process. Being well prepared is the key. Having the best-suited team of M&A, accounting/tax and legal advisers is of critical importance to a successful outcome. It is difficult and often stressful trying to understand the scope, focus, requirements and expectations of each party in a DD process without prior experience. The right team will help prepare the seller and business for the scrutiny of a thorough due diligence process.
It is in both parties’ interest that DD be carried out by the buyer. Whilst the benefits to the buyer are obvious, there are also benefits to the seller.
Sellers are usually expected to provide warranties. If the buyer has had the option to conduct DD, or better still, completed a DD review, many of the aspects that a seller may otherwise be expected to warrant can be checked first hand by buyers and their team, and may even mitigate a claim of misrepresentation.
Most M&A advisory firms co-ordinate and facilitate the due diligence process between the parties and their advisors. They also have facilities to operate virtual datarooms, allowing multiple bidders to access sensitive client files in a controlled environment.
What to cover in Due Diligence
To prepare for the sale process, including Buyer Due Diligence, it is recommended that Vendor DD be conducted by the seller and their advisors, covering a wide range of aspects.
A comprehensive Buyer/Vendor Due Diligence checklist can be provided by Divest Merge Acquire on request.
Areas covered include:
More and more of our clients’ businesses are being acquired by those at the top of the business acquisition food chain, or those aspiring (and acquiring) to be there.
Major ASX and international listed companies have traditionally set their threshold transaction sizes fairly high. They have, in the past, tended to be ‘fed’ by private equity (PE) firms performing intermediate roll-ups over a 3-5 year timeframe.
With increasing numbers of businesses coming onto the market, those ‘top of the acquisition food chain’ players have been coming forward in increasing numbers to snap up the offerings direct, instead of waiting for them to be packaged up by intermediaries.
Specifically, we have seen a trend whereby local and international listed companies are stepping in with their dedicated in-house M&A teams, moving more quickly and efficiently than many Institutional PE firms’ outsourcing compliance protocols permit.
It’s not yet an out and out feeding frenzy, but it can be if the target is sweet enough.
The target businesses may have enterprise values (EVs) starting from say $2M, up through $100M and well beyond. Of course they will, and do, acquire much larger businesses.
Institutional PE firms’ due diligence processes are usually slow, onerous and expensive. These are often a deterrent to many on the ‘sell side’.
By comparison, local and international listed companies, with their due diligence (DD) reviews often done internally, can move very quickly and efficiently. Their DD can be targeted and quite surgical at times.
Another interesting comparison is the types of businesses they are buying. Local private equity firms tend to follow each other into particular industries. RTOs (registered training organisations) are currently their hot spot of interest. Virtually every RTO that comes onto the market is snapped up by a private equity investor doing a roll-up. We’ve received as many as 120 responses on individual RTOs taken to market by us or our affiliate MNA Direct which performs direct marketing on behalf of other advisory firms. Sometimes more than 30 responses in the first hour! By comparison, local and international listed companies are interested in a much broader range of industries, ie the other 20,000 types of available businesses.
Even more importantly, they can and will pay more where there is a great strategic fit, pocketing all of the PE (price earning) multiple arbitrage for their own shareholders.
In particular, overseas listed companies seem to be paying higher multiples, perhaps a reflection of the relative strength of their economy and ours. Aus/NZ businesses seem like bargains to many of them.
All the more reason for the small fish to want to be caught!
This takes us well away from the bottom feeding peddlers of doom and gloom about the growing over-supply, trying to push prices and EBIT multiples down further.
M&A advisory firms with access to specialist M&A local and international databases that record and track the acquisition aspirations of large numbers of these leading companies, and who have regular and ongoing direct interaction with their in-house M&A teams, are very well placed to achieve great outcomes for their vendor clients.
Those same databases are being used increasingly by the ASX and international listed acquirers to perform acquisition searches to source possible targets from specific industries.
Contact Divest Merge Acquire on 1800 700 111 for more information.
M&A means Mergers and Acquisitions. It also covers business sales/divestments, as most strategic businesses sold are ‘merged’ into larger businesses as strategic bolt-ons, hence the ‘M&A market’.
The M&A market is an early indicator of business confidence, as there are virtually no lags before buyers either come or go. Buyer volatility is the key variable in the M&A market.
The good news is that business confidence is relatively high, which has been driving the market for business sales and acquisitions over the past year.
Our own stats show M&A activity has been progressively growing stronger since the last federal election. We don’t think it’s a coincidence, as conservative federal governments generally engender greater confidence by creating greater stability (or at least the perception of it). M&A activity is stronger despite the continuing fragility of many industries and the economy generally.
The reason for this is because strong M&A activity requires stability to bring buyers out. Stability is vital. Even stable under-performance is more conducive than volatile growth and uncertainty, which drive buyers away. Investors need to know how target businesses are performing and are likely to perform, and they can’t assess that against a backdrop of volatility where historic performance is irrelevant and the future is unknown.
It’s not plain sailing, however. On an industry by industry basis, the languishing resources and manufacturing sectors have become difficult to finalise deals in. Even importers are finding the going tough, with ongoing quality issues and, more recently, exchange rate movements. However niche manufacturers remain popular, especially those with substantial long term contracts and maintenance-related recurring revenue streams. Construction businesses are also performing more strongly on the back of a housing and infrastructure resurgence.
The long term picture for business sale transactions is positive, as the majority of baby boomers are now in their 60’s and heading to retirement. This is creating a target-rich environment for strategic investors. It also tends to keep EBIT multiples in check and this pressure is set to continue. However, owners’ expectations are now more realistic and many can afford to sell at today’s prices because they have worked longer than expected and have made up the value shortfall in additional profits rather than placing all bets on a massively happy, tax-effective ending. Their super accounts are also replenished after having been routed in the GFC.
There’s another complication too. Businesses operate in industry sectors that each has life cycles as in the following chart.
Most retiring baby boomers have been running traditional businesses in mature industries, some of which are in long term decline.
Businesses being sold are usually acquired by the following generation’s entrepreneurs. There is an emerging structural mis-match between the types of businesses for sale and what buyers will be looking for. Younger buyers are attracted to new business models and will progressively shun the old-style business models of their predecessors.
However, industry consolidators moving into mature markets capitalise on the high volumes and strong demand, extracting efficiencies and profits from traditional low risk sectors. They prolong and extend the life cycles and build major industry groups as substantial cash cows that they can either on-sell or retain and milk for many years. They can also bring innovation that extends or even reinvigorates industries. Bolt-on acquisitions are the staple diet of these business aggregators. They disappeared during the GFC but are now back in droves.
Here are more charts that explain what’s happened and is happening.
The past 6 years in the M&A market has been punctuated by the following events:
Market instability from 2008 caused deal conversion rates (sales completions to total sale engagements) to plummet. Recently growing confidence, greater stability and market balance has brought the conversion rate back up to pre-GFC levels.
This explains why Divest Merge Acquire is tracking for a record year, with substantial deals completing across Australia, including Adelaide, Darwin, Sydney, Brisbane and many places in between.
The strong M&A market and expectation that it will continue on a growth cycle are also behind our decision to open up our Aus/NZ member firm advisory network from the current 7 offices and franchises over the next 12 months. Coverage has already extended to the WA market, with the recent addition of a Perth-based Member Firm advisor.
Progressively more and more baby boomers’ businesses are coming onto the market, but the buyers will continue to come and go depending on business confidence at the time. Business owners intending to retire soon should be making the move when buyers are active. The buyers are active now, so Carpe Diem!
Why Understanding the Endowment Effect is the Key to Selling Anything
Ever wondered why selling a professional service seems much harder than getting people to exchange cash for a tangible product?
Surprisingly, the reason drives issues such as compulsive acquisitiveness and hoarding, and even irrational investing. It influences everything from economics to law.
The same hard wiring in our primal brains drives this irrational behaviour. It also has implications for selling everything, from tangible products to services and even the need to pay taxes!
Once someone owns something, he places a higher value on it than he did when he acquired it—an observation first called ‘the endowment effect’ approx. 30 years ago by Richard Thaler.
‘We value more highly things we own than things we don’t own.’
‘Most people demand higher price to give up an item than they would be willing to pay for it’
Mankind’s inner chimpanzee refuses to let go
In one experiment, people demanded a higher price for a coffee mug that had been given to them but put a lower price on one they did not yet own.
People are reluctant to trade what they have for a promise to receive something else from a stranger.
Whether this is irrational or not depends on the circumstances of the trade.
Humans, like our primate ancestors, really don’t like losing things. In fact, we get much more emotional about losing things than we get happy about gaining things.
Some psychologists think that the endowment effect results not from loss aversion but from a sense of possession, a feeling that an object is ‘mine’. Ownership creates a bond between the item and the self, and this increases the value of the item.
We humans are not perfect calculators. Instead, we overvalue our possessions because they contribute to our identity and the identities of the groups we belong to. We don’t overvalue goods because we’re loss averse; we overvalue goods because they are part of who we are.
How it affects investing
The endowment effect has immediate implications for investors.….the tendency to ‘love what you own’ applies to the shares, bonds and funds in your portfolio. We have a natural tendency to be lenient on evaluating the performance of investments we own. If the market says our stock is worth $10, we think it’s worth more even before we perform any analysis whatsoever. Not surprisingly, this bias does us a disservice. In order to overcome the endowment effect, we need to equally scrutinise both what we own and what we don’t.
Losses are perceived as 2.5 times more powerful than gains
While a piece of timber saved for a possible future project might cost only $1, in the hoarder’s mind, it is worth much more. Studies estimate perhaps $2.50. If the timber is disposed of, but then later needed for a project, the perceived price to replace it in the future could become even higher, if the cost of time to get it is considered.
Hoarders – those for whom parting with possessions is more painful
Once hoarders have acquired something, even worthless junk, they value it highly.
It becomes hard for many to give up an object. “Thanks to the endowment effect, it is so much easier to convince yourself that a high income justifies buying expensive things rather than throwing away cheap ones.”
While there may be many books, stuffed animals or DVDs that are exactly the same as the ones stuffed in your closet, there’s something special about the copy you own specifically because it’s yours.
Armed with knowledge of the endowment effect’s pull on our psychology, Mind Hacks calls for the enlightened hoarders to ask themselves: “If I didn’t already own this, how much effort would I put in to buying it?”
Acquisitiveness
Decisions to acquire and discard everyday goods differ across frames, items, and individuals. In a society where material resources are superabundant, people routinely struggle with the fact that goods are attractive and easy to acquire, but hard to manage and discard.
Selling products and services
The endowment effect explains why people are much more price-sensitive when buying a service than a physical product they can take away with them. At least when buying a product, you balance handing over cash with acquiring the product and your brain walks away happy.
So while a person will happily pay big $’s for luxury goods they don’t need, they will be miserly when considering paying for a service even if they believe it might benefit them greatly.
US Retail chain Nordstrom, overcomes the endowment effect by offering unconditional returns.
Accountants, lawyers and other professional service providers need to work very hard to sell the benefits of their particular services. Otherwise they fall into the ‘necessary evil’ category, along with taxes. And yet they are renowned for being generally devoid of selling skills!
We can’t fight the primal endowment effect. Instead we need to work out what other, stronger human need our service appeals to.
The security industry benefits from their service being aligned with the endowment effect, assisting us keep what we already have.
Tax collection authorities need to explain where these taxes go, work diligently to remove real and perceived waste, so we feel better about parting with our assets. Things like health, national security and even a social safety net are critical, yet the waters are so muddied by all the peripheral activities governments allocate our taxes to; and then there’s the waste…
Prostitution services is an interesting one…..clearly other primal human instincts are even stronger than the endowment effect!
Tips for when presenting, say, a business sale marketing budget
Our brains’ hard wiring explains why business owners will naturally want to skimp on the sale marketing budget.
Clients may strive to save a few thousand dollars in the marketing phase, only to give away tens of thousands of dollars during negotiations with a single buyer, when just one more buyer could have made a huge difference to the outcome. We have to be specific about how much stronger the process will be when we attract a larger contingent of targeted buyers.
We must highlight the expected benefits, including increased certainty of a result, a higher price and a wider range of possible outcomes.
Here are the key elements of an effective proposal for Raising Investment Capital.
1. Step into the shoes of investors
2. Outline the business model and where you see the business going
3. Secure key assets, relationships and IP
4. Showcase your track record of achievement (if there is one)
5. Determine what resources are required
6. Explain in detail what you need the money for
7. Decide on the overall value of the business with the investors’ funds included
8. Decide on the optimal organisational, legal and financial structure
9. Decide on the profile of the investors
10. Set out exit strategies for the investors, including how and when
11. Set out all the above items in an Information Memorandum or Prospectus
12. Engage an appropriate M&A Advisory firm
We are often asked this question and there’s a simple answer.
It is natural for someone in a particular location to be outward-looking and focus on how to reach buyers in a particular foreign market after hearing that a migrant from that country bought a business from someone you know. However, it is impractical to attempt to market a business opportunity to intending migrants from ALL POSSIBLE target countries at their source; and there’s really little point!
If you are moving permanently from Sydney to Singapore and wanted to buy a business there, where would you look?
Of course you would look for opportunities advertised in Singapore, not Australia! And you would probably ask your Singapore based migration agent for suggestions and referrals to those who can help you.
Similarly, if you were an intending migrant to Australia you would search in the destination and ask your Australian migration agent for help.
Well-heeled Business migrants from a wide range of countries are swarming to Australia and are buying $1M+ Australian businesses. Migration Programs are forecast to attract a record of 190,000 immigrants in 2013.
Of these, Skilled Migration Programs currently total around 130,000pa and comprise:
Key source countries for Australian business migration are the UK, India, China, South Africa, Malaysia, Philippines, Korea and Indonesia. Others include: USA, Canada, France, Germany, Japan, Netherlands, Italy, Brazil, Nepal and Pakistan.
In 2012 the Australian government introduced Business Innovation and Investment visas to provide a boost to the Australian economy by encouraging high net worth individuals seeking permanent investment migration to establish or buy businesses.
There are three visa streams:
So what is the most efficient and effective way to make sure intending business migrants worldwide know that a business is for sale?
The key is to establish direct access with local migration agents, many of whom actively assist migrants source suitable businesses. In this way, migrants from all countries are catered for.
This is superior to engaging agents or brokers that specialise in sourcing migrants from a particular region or country, as they tend to exclude most others. For example, a Chinese or Singapore aligned broker would generally not adequately cover the European market, which has proven to be quite substantial.
Divest Merge Acquire has direct access to the majority of Australia’s 4,700+ Registered Migration Agents.
In this way, Divest Merge Acquire gains maximum exposure to migrants from all source countries.
Immigration agents receive regular updates on business opportunities in the $1M+ categories. Not only do they receive monthly email outs for both Divest Merge Acquire and MNA Direct (which markets business opportunities on behalf of others), but they are also offered incentives for referral of successful purchasers.
For information about government migration visa initiatives:
http://www.immi.gov.au/media/fact-sheets/27business.htm
http://www.immi.gov.au/skilled/business/_pdf/significant-investor-faq.pdf
Immigration Program stats:
http://www.immi.gov.au/media/statistics/statistical-info/visa-grants/migrant.htm
http://www.immi.gov.au/media/statistics/country-profiles/
If you rely on web or print advertisements for marketing business sale or acquisition opportunities in the $1M-50M market – you are doing it wrong!
While posting ads and waiting for active buyers/sellers to find and respond to an opportunity may yield mild success in a booming market, it becomes significantly less effective in a slower market when buyer activity is reduced. Today, an active marketing approach is required.
Web marketing, the most prevalent passive marketing option, is best suited to the broader ‘buy-a-job market for small businesses (<$1M). In this market, buyers are characterised by their large numbers, absence of strategic focus, low volume of acquisitions (often one per buyer) and relatively short shelf life of time in the market. All of these factors make it pointless to try and maintain a current database of buyers. Web marketing serves as a valuable tool for presenting an opportunity to such a broad and transient market.
The effectiveness of passive web marketing decreases quickly as the value of businesses rises above $1M, where the profile of buyers shifts considerably.
The chart below shows the relevance of each different buyer profile over the range of business values:
The absolute number of prospective buyers for any given business reduces substantially as the value of the business increases. Once business values outgrow the owner-operator/“buy-a-job” market, astute M&A advisors understand the advantages of contacting strategic buyers direct on each sale opportunity. Strategic buyers are those with the most to gain and the least to risk from an acquisition. They are in the best position to leverage a business’s resources, IP and assets, and therefore place the highest value on the business. The methods used to undertake this targeted marketing differ greatly with the size/nature of the businesses being marketed:
Presenting relevant opportunities to as many target buyers as possible is the goal. So the question arises:
How do you identify and target strategic buyers efficiently when they number in the thousands?
The answer: Targeted Direct Marketing.
Targeted Direct Marketing is consistently highly effective in the mid-size range of SME’s between $1M and 50M in value. In this market, strategic buyers may or may not be actively looking but will certainly be interested when a good strategic fit is presented to them.
With the right database and an effective marketing system, between 1,000 and 3,000 targets unique to each individual opportunity can normally be identified, targeted and contacted in a very short space of time.
Identifying target buyers
Identifying large numbers of strategic targets for any given opportunity can be facilitated by first developing a profile of the most likely buyer groups and nominating appropriate SIC (standard industry classification) codes related to each. The optimal process for selecting appropriate SIC codes typically involves a stepped approach, asking the following high-level questions:
Once the SIC profile of target buyers has been identified, the next step is to generate a list of target contacts from a suitable database.
Which database?
To be effective, it requires more than a generic database such as those available from list brokers. Not only must the database contain up to date relevant contacts, but it must contain and track all relevant attributes including accumulated history and investment preferences, SIC code mapping, and in-depth profiling data for each contact. To meet these criteria, it must be used regularly for M&A activity and be kept up to date.
With the right (reliable) database resource, a list of target contacts unique to each opportunity can be identified by searching for the selected target buyer criteria. In our experience, this generally ranges between 1,000-3,000 contacts per project.
So you have the list of contacts… what now?
Mail and email are the two most effective options for contacting thousands of targets quickly, efficiently and accurately. Provided the database resource used to identify the targets is current and properly indexed, marketing materials will be delivered directly to the key decision makers in each target organisation. Where a target buyer is already a registered email subscriber to the database, an email is sent. Where they are not, post is the most effective method.
A complete direct marketing solution will also provide a full direct mailout and email system with tracking and reporting. Responses from interested buyers need to be sent promptly through to the project advisor for action.
For those using a combination of direct and web marketing of businesses in the $1M-$50M segment, direct marketing consistently accounts for more than 80% of the businesses sold.
Direct marketing is even more valuable in today’s market, where many buyers are sitting back and are not actively searching. They can be brought forward to the market by being presented with businesses that offer an attractive strategic fit and leverage.
Typical case studies demonstrating the effectiveness of direct marketing to targets in the Australia/New Zealand market are as follows:
Case study 1 – Laser Cutter
| Target industries: | Fabricated metal products, private equity |
| Number of SIC codes selected: | 16 |
| Number of target contacts selected: | 2300 |
| Targeted responses | 40 |
| Sale Project Status |
Case study 2 – Security Monitoring
| Target industries: | Security systems services, private equity |
| Number of SIC codes selected: | 9 |
| Number of target contacts selected: | 2000 |
| Targeted responses | 106 |
| Sale Project Status | Under Contract |
Case study 3 – RTO
| Target industries: | Educational Services, mining, private equity |
| Number of SIC codes selected: | 10 |
| Number of target contacts selected: | 1200 |
| Targeted responses | 77 |
| Sale Project Status | Sold |
Case study 4 – Plant Equipment Hire
| Target industries: | Heavy Construction, Mining machinery, Equipt hire and rental, private equity |
| Number of SIC codes selected: | 19 |
| Number of target contacts selected: | 2900 |
| Targeted responses | 82 |
| Sale Project Status | Withdrawn from market |
Case study 5 – Electrical Contractor
| Target industries: | Electrical contractors |
| Number of SIC codes selected: | 4 |
| Number of target contacts selected: | 1400 |
| Targeted responses | 17 |
| Sale Project Status | Sold |
An article on Divest Merge Acquire’s website explains in more detail how Divest Merge Acquire uses targeted marketing: Business Opportunity marketing: Why so few M&A advisors get it right.
Divest Merge Acquire’s Database
Recognising the effectiveness of direct marketing early on, Divest Merge Acquire has invested more than $3.5 million and over 20 years developing an M&A-specific database. This resource is proven, having attracted over 85% of buyers for all transactions completed by Divest Merge Acquire.
A team of people continuously updates the database, which is rich with investment parameters and history of all contacts and their activity. This makes selection and qualifying targets a highly efficient and effective process.
Divest Merge Acquire’s marketing resource is utilised in marketing all Divest Merge Acquire clients, and has proven highly effective in both Divestment and Acquisition search engagements.
For other M&A Advisors or Professionals involved in buying/selling businesses
This marketing system is also available to other M&A advisory firms and professionals selling businesses (eg accountants, business brokers etc) via MNA Direct.
MNA Direct, (www.mnadirect.com) offers a direct marketing solution for those selling Australian and NZ businesses. MNA Direct can provide a boost to any M&A marketing process in the $1-50M enterprise value range, where buyers in large numbers can be targeted on an industry by industry basis.
