What retail owner hasn’t observed a major acquisition or sale play out in their industry and dreamt of their own irresistible offer from a potential buyer?
Zimmermann changing hands for $1.75 billion. Bondi Sands being snapped up for $450 million. Tattarang sweeping up the iconic RM Williams and Akubra brands. All life-changing deals for their founders and executives.
Impressive in scale but with a common factor – a clear succession plan that allowed them to react quickly when a sale opportunity came along.
It also pays to know your potential buyer, whether the plan calls for a sale to existing management, a local competitor, an international competitor or a private equity fund.
Despite the obvious soundness of succession planning, there remains a deep disinclination to create such plans among many middle market business leaders.
Australia is preparing for the mass retirement or exit of as many as one million business leaders. It’s estimated that the owners of 40% of Australia’s businesses are within 10 years of retirement age.
Succession planning is the best avenue to avoid a legacy vanishing without trace. If a sale is part of that plan, each option requires an introspective look to determine which buying market is most suitable.
Existing management
For many owners, existing management is the first option. Confidentiality isn’t an issue, with the management team already having a good working knowledge of operations.
Management was probably hand-picked by the owner or founder and seen as a safe pair of hands to carry the business forward, which is reassuring for staff, investors and suppliers.
One key element to consider in a management buyout is funding. Often the management will not have enough capital to fund the full acquisition price.
In this scenario, the founder may need to offer vendor financing, which generally requires several years to be fully settled.
If you are a founder who may struggle to let go of running the business with a vested interest, this can potentially create problems for both the founder and the management team post deal.
Local competitor
Confidentiality comes into play when considering a sale to a local competitor but it could be a logical home for a business, even when it is on the smaller side.
This plan has significant privacy hurdles to negotiate in sharing detailed information with a competitor, not to mention that a founder may have to take a deep breath, especially if a rivalry was somewhat bitter or tense.
Synergies with a local competitor may result in job losses, the consolidation of brand names and other combined effects, which may not be palatable to the selling founder and will require a communications plan to reassure staff and other stakeholders.
On the plus side, there are opportunities to push for a higher price as a result of the benefits that the buyer stands to gain from the absence of a competitor.
International competitor
The appeal to an overseas buyer is usually to provide an access point into Australia and potentially the broader Asia-Pacific region, or to widen its footprint.
There are fewer concerns with respect to confidentiality as the acquirer is not a direct competitor, although in some cases they be a group that holds other competing brands.
Typically, to attract the attention of an overseas buyer, the business for sale should be of significant scale that justifies entering a new geography or territory.
Given a buyer usually has little on-the-ground presence, it typically means an owner or founder will have to continue working in the business, at least for a transitional period.
Private equity
If your business has earnings of $5 million or more, and strong growth prospects, private equity might be your preferred outlet.
Typically private equity firms don’t acquire 100% of the business upfront, but they do allow the owner to take some cash off the table now while still sharing in future upside of the aforementioned growth.
It can be attractive for the owner or founder who wants to keep the band together and stay in the business over the medium term, but despite some of the eye-watering sums you’ve heard, private equity players typically don’t pay as much as trade acquirers.
Private equity generally isn’t a long-term home for the business being sold, given they are seeking rapid growth before selling out within the medium term.
The common thread
A successful sale, whether to management, a competitor, or a private equity firm, is not just about the right buyer – it’s about being ready when the time comes.
The latest Pitcher Partners Business Radar Report found one in five business leaders either didn’t have a succession plan in place or didn’t know if one existed.
A further 4% didn’t think they needed one. This reluctance to crystal ball is putting the future of many middle market businesses at risk, as Australia prepares for the mass retirement or exit of as many as one million business leaders.
The data suggests that the time and complexity involved in passing the torch is being heavily underestimated.
Don’t ignore the issue that risks putting that legacy at risk and don’t wait for impending change. Start succession planning conversations early, know your buyers and be ready when the opportunity presents.
