It’s not all about you! Or at least it shouldn’t be. That’s one of the messages that our guest interviewee, Mark Parow, has for our listeners this week.
As one of the most successful management buyin / buyout candidates that Australia has seen over the last decade, Mark has first-hand experience in buying, building and successfully exiting business. He also brings a wealth of experience in dealing with Private Equity. Given this experience, Mark knows all too well the pitfalls and challenges which business owners face in developing and executing a business exit strategy. He offers this advice:
It’s not all about you…
The first two episodes of season 2 touched on the issue of key person dependency, but in this episode we dive deeper! Where a business is entirely or heavily dependent upon its owner, in terms of operations, relationships and/or profit, two significant issues arise when it comes time to exit:
- You might get stuck – once you sell a business, you don’t really want to stay in that business, you likely want to move on; but where the business depends on you, it is likely the purchaser will want to contract you as an employee for a number of years after the sale;
- The price goes down – if the business is dependent on you, then a prospective purchaser is less likely to see value in that business, which translates into a lower sale price.
While similar issues can arise with key management/executive leaders, this is something that can be overcome with careful planning. Talking to key employees early and ensuring that they profit out of the exit transaction ways to keep management personnel on board, not only through the exit but also in the post-exit period.
An advantage of not being central to the day to day operations of the business is that you have time to plan and strategise. Mark says that the first thing he thinks about when he purchases a business is how he is going to exit that business; the time frame, the potential purchaser and the value he needs to build in the business to make it a desirable acquisition. This early planning is essential to realising maximum reward for your hard work.
Private equity – should you get involved?
Having worked closely with private equity (PE), Mark is a keen supporter of partnering with PE to realise the potential of your business. If you go down this track Mark has some golden rules:
- Be frank and upfront – this is the best way to build trust in the relationship.
- Don’t overpromise and under deliver – the one thing PE won’t tolerate is continually failing to meet budgets, KPIs and other expectations.
- Play to your strengths – business owners are generally great at operations and internal relations, while PE has the expertise when it comes to strategy, acquisitions and exits – stick to what you know and exploit the strengths of the other.
When it comes time to exit, however, Mark advises to think carefully as to whether you will maximise value selling to PE. This is because you may, depending on the circumstances, get a better result from a trade sale.
Get to know your competition
As we’ve drummed into you by now, it’s important to be thinking about your exit from day one; that means you need to be thinking about potential purchasers from day one. All too often your prospective purchasers will be your competitors. They are the ones who will be best able to exploit synergies between the companies and realise the value of your business. If you can establish a relationship with your competitors it gives you more power to be able to manage your exit and maximise your return.
*Please note that Martin and Ed’s business exit strategies are general in nature and do not take into consideration any of your personal circumstances. Further, Martin and Ed are not financial planners or accounting experts. You must seek individually tailored advice to ensure you properly prepare for your business exit.