Business mentor: Strategic buyer the one to pay premium price

Q. I am a small business owner, just back from my summer holidays. I am feeling refreshed and am focused on working on my business this year. As part of my strategic planning, I have been exploring some new business ideas and also thinking about funding my retirement so I am thinking about selling my business. I would like to start developing an exit strategy which will ensure I maximise the opportunities and profits when the opportunity arises to sell or merge. Can you please advise on how I should go about doing this?

Small business sector specialist Sarah Trotman asked Tom McKaskill, the world's leading researcher in the development of exit strategies for privately held companies, for some advice.

A. How can you sell your business at a premium? The key is to develop a pro-active exit strategy.

Using this approach, it is not always the balance sheet that makes a business look attractive to a would-be buyer.

If your business has the right attributes, it can develop a pro-active exit strategy with a high chance of achieving a premium-selling price - well above what the company's balance sheet might suggest.

To achieve a high premium on a sale, a business has to find a way for the strategic buyer to increase revenue by using assets and capabilities that are already built into the business.

The strategic buyer takes what already exists or is being done in the business and puts this into a new environment where they can be exploited for higher revenue and profit. The size of the opportunity is what justifies the size of the sale premium.

Before you start looking for a strategic buyer, you have to ask some key questions:

* What company or corporation has a large customer base that would buy my products?

* If I have a large customer base, what corporation has a set of products that could be readily sold into my customer base?

* Could my products or underlying technology be used to open up new markets for a big company with the resources to fund market development?

* Do I have products that could be easily modified or extended to create new products that could be sold to the customer base of a big corporation?

* Could my business provide the catalyst for a large corporation to break into a new growth market?

Most often, the seller and the strategic buyer are in the same industry. They often sell to the same customers and markets. As a result, potential buyers readily appreciate an opportunity once it is presented to them.

The best strategic buyers are experienced ones. They will have staff who frequently undertake acquisition evaluations, experienced executives who assist in the integration of new businesses and acquisition processes that are able to readily evaluate an obvious synergistic opportunity.

But even a good opportunity will not normally get results without some preparation. A premium-selling price can be justified only if the vendor's business can be rapidly integrated into the buyer's organisation and if the opportunity can be readily exploited.

That means the business must be ready for immediate sale, with no underlying problems, risks or potential litigation. Internal systems for performance management, compliance and operational efficiency have to be in place and working.

I'm often asked if the pro-active exit strategy approach works. The answer is it sure does. I have examined examples of businesses that have achieved a high premium and these always show that the buyer was seeking some underlying strategic asset and that the present revenue and profit of the acquired business had little to do with the price paid.

* Tom McKaskill is professor of entrepreneurship at Swinburne University, Melbourne. He is presenting a practical workshop, Preparing Your Business for Exit, on February 7 at Unitec to help entrepreneurs and business owners build a plan for either selling their business through a pro-active exit strategy process.

This systematic approach will allow businesses to evaluate their preparedness for a sale and also guide them to target potential buyers most likely to pay a premium price. The workshop also provides a checklist to help businesses identify where they are at and to develop an action plan of the steps they need to take to achieve the best price.