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02 Apr 2012

Preparation equals value with private business exits

Melbourne, 2 April 2012: Owners of privately-owned businesses should ensure they are sale-ready and able to move quickly if they receive an attractive purchase offer, or risk failing to maximise the true value of their investment, according to Clayton Utz partner Nick Miller.

Nick, who specialises in negotiated merger and acquisition transactions and has acted for both buyers and sellers, including private equity funds, said a business that is poorly prepared for sale can potentially result in the loss of significant value. This could be avoided if potential roadblocks to a successful sale were addressed well before the business owner received any approach to buy.

"Privately owned business represent around 97 per cent of all businesses in Australia today[1], and forty-five percent of private business owners say they are actively planning the future sale of the business," said Nick. "Ensuring that the business is ready to respond swiftly to an approach by an interested buyer means getting your house in order first – even if no-one comes knocking immediately. This is especially so as private equity interest starts to pick up – presenting more opportunities for an exit but also a type of buyer who will discount value for perceived 'defects'."

Nick said there were several common but often overlooked issues encountered in privately owned businesses that reduced value, including problems with intellectual property, structure, key contracts and employees, and data room preparation.

"For example, a business owner may think the business owns the rights to key intellectual property such as domain names and logos, but finds out that, perhaps during an earlier acquisition by the business, these rights have failed to be acquired, or properly registered," said Nick. "Engaging a contractor to design and provide content for marketing tools such as catalogues, or a website or logo, or to write a critical piece of software that now provides a competitive advantage, can also create problems if the ownership of copyright is not expressly dealt with in the terms of the contractor's engagement. Otherwise, the contractor will usually own the intellectual property in their work, meaning that the business owner will not own a critical asset of the business that the buyer will be expecting to purchase."

The way the business is structured may also mean it is not readily transferrable to a buyer, causing potential headaches. "An example of a structure which can present problems is where a single company operates a number of businesses and buyers are likely to only be interested in one of the businesses. That is, no-one is likely to want the whole package. Practically speaking, the only way to sell is by a business sale. However, in certain situations selling in that way could present a serious problem," said Nick.

Nick said increasing the level of formal governance in some privately-owned businesses can assist in reducing risk, identifying issues that might emerge upon a sale and generally enhancing the credibility with which the business presents to potential buyers. This might involve establishing an advisory board, for example, members of which include parties external to the business.

"Most of the common barriers to the successful sale of a privately owned business are all fixable," said Nick. "Ultimately value is maximised when the owner identifies these issues early on and there is some time to deal with them. Preparation is the key to maximising exit value."

[1] MGI Australian Family & Private Business Survey

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.