THE VALUEMAX WORKBOOK - maus.com.au

The ultimate Guide to Exit & Succession Planning!

THE VALUEMAX® WORKBOOK

Copyright MAUS Business Systems. All rights reserved worldwide (www.maus.com.au) Publication: Peter Hickey/MAUS ValueMax® Workbook

Designed to help business owners successfully build value and one day exit the business.

W W W . M A U S . C O M . A U

By Peter Hickey

COPYRIGHTS

© 2017 Copyright MAUS Business Systems (Corprat Pty Ltd trading as MAUS Business Systems) All rights reserved.

No part of the material may be reproduced in Australia or in any other country by any process, electronic or otherwise, in any material form or transmitted to any other person or stored electronically in any form other than what has been supplied by the publisher unless express written permission is provided by the publisher.

ACKNOWLEDGMENTS:

Author: Peter Hickey Contributing Editors: CCH/EBC and MAUS Editors and Clare Loewenthal Publisher: MAUS Business Systems www.maus.com.au [email protected]



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IMPORTANT DISCLAIMER & COPYRIGHT No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication and/or software package is sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, authors, consultants and editors expressly disclaim all and any liability and responsibility to any person – whether a purchaser or reader of this publication or not – in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

Warranties, Liability and Indemnities This manual and any examples contained herein are provided “as is” and are subject to change without notice. The companies make no warranty of any kind in regard to this manual. Except as expressly provided to the contrary in this agreement, the companies shall not be under any liability to the licensee in respect of any loss or damage (including consequential loss or damage) howsoever caused, which may be suffered or incurred or which may arise directly or indirectly in respect of the supply of the products or services pursuant to this license agreement or the failure or omission on the part of the Companies to comply with its obligations under this agreement. The licensee should check all reports at the time of production for their accuracy. Except as expressly provided to the contrary in this agreement, all warranties – whether express, implied, statutory or otherwise – relating in any way to the subject matter of this agreement or to this agreement generally, are excluded. Where any law implies in this agreement any term or condition, and that law avoids or prohibits provisions in a contract excluding or modifying the application of or exercise of or liability under such term or condition, such term or condition shall be deemed to be included in this agreement. However, the liability of the companies for any breach of such term shall, if permitted by that law, be limited at the option of the companies to any one or more of the following:

The replacement of the goods The repair of such goods

HISTORY OF THE WORKBOOK

2003: The Business Attractiveness Assessment and Exit Readiness Assessment were first launched.2005: The assessments were updated, published and reproduced by the Institute of Exit Advisors – an Australian institute founded by Peter Hickey. This institute later was replaced in support of EPI. 2006: Core content of the workbook was published in the software SellBiz Pro by Corprat Pty Ltd.2007: The workbook was released at bookshops and published internationally under the title Sell Your Business Now.2013: The electronic workbook was updated and republished.2017: The workbook was published under the title The ValueMax® Program by MAUS Business Systems.1993-2015: The Business Attractiveness Assessment and Exit Readiness Assessment have been the core of all versions. Over the years, we have increased the level and depth of the Personal Readiness Assessments and updated them in the new release of software. The detailed marketing audits were first published by Peter Hickey in the MAUS MasterPlan in the 1990s and updated in 2005, 2010 and 2015.

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TABLE OF

CONTENTS >>

Copyright MAUS Business Systems all rights reserved worldwide ( www.maus.com.au )

Publication: Peter Hickey / MAUS ValueMax® Workbook

BUSINESS OWNER EDUCATION 20

THE ONE PAGE EXIT & SUCCESSION PLANNING TEMPLATE 70

IMPORTANT DISCLAIMER & COPYRIGHT 03

WHAT HAPPENS WHEN YOU GET IT WRONG? 60

TIPS ON GETTING THE BUSINESS READY 86

WORKBOOK OUTLINE 12

WORKBOOK PROCESS 13

FOREWARD: A PERSONAL NOTE TO BUSINESS OWNERS FROM THE AUTHOR 16

CHAPTER 1

CHAPTER 2

HELPING BUSINESS OWNERS ACHIEVE THEIR DREAMS 18

UNDERSTANDING THE NEED FOR EXIT PLANNING 23

THE ONE PAGE EXIT PLAN 72

TIP #1 HUMAN RESOURCES 90

HOW TO CREATE A VALUABLE BUSINESS 27

REVIEWING YOUR ASSESSMENTS 83

PERSONAL CONSIDERATIONS 33

BEHIND THE ONE PAGE EXIT PLAN 74

START WITH THE END IN MIND 39

SAMPLE ONE PAGE PLAN 79

PLANNING STARTS WITH KNOWLEDGE – UNDERSTAND THE ‘WHY’ 43

WHAT NOT TO DO 47

BUSINESS READINESS ISSUE 62

HOW TO EXIT - TYPES OF BUYERS 51

PERSONAL READINESS ISSUES 64

WHAT DOES EXIT & SUCCESSION MEAN? 57

WHAT HAPPENS WHEN EVERYTHING GOES RIGHT? 67

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TIP #2 MARKETING PLANS & SYSTEMS 92

TIP #4 FINANCIAL DOCUMENTATION 96

TIP #6 CREDIBILITY & BRANDING 100

TIP #3 CONTRACTS 94

TIP #5 IP & COMPANY DOCUMENTS 98

MODULE 1: BUSINESS OVERVIEW 124

MODULE 7: EDUCATED EXIT PLANNING GOALS 232

BUSINESS FACTORS 268

MODULE 8: EXIT PLAN IMPLEMENTATION 238

FORECAST FACTORS 272

INVESTOR CONSIDERATIONS 276

MODULE 9: MONTHLY REVIEW 252

MARKET FACTORS 274

MODULE 2: BUSINESS READINESS 136

MODULE 3: BUSINESS OWNER PERSONAL READINESS 154

MODULE 4: BUSINESS VALUATION 164

MODULE 5: EXIT OPTIONS REVIEW 186

MODULE 6: GAP ANALYSIS & ACTION PLAN RECOMMENDATIONS 218

THE MAUS VALUEMAX® SUMMARY 102

THE MAUS VALUEMAX® STEP-BY-STEP WORKBOOK TEMPLATE 118

THE DETAILED ASSESSMENTS 262

PERSONAL WEALTH, RISK & TAX 332

THE DISCOVERY PROCESS 122

CHAPTER 3

CHAPTER 4

CHAPTER 5

PERSONAL EXPECTATIONS 286

VALUE READINESS 292

MARKETING DOCUMENTATION & SYSTEMS 298

MANAGEMENT SYSTEMS AND FORECASTS 308

CUSTOMER CONTRACTS 314

SYSTEMS PROCESSES 320

GOVERNMENT GRANTS 327

PERSONAL CASH FLOW AND BUDGET 338

PAYMENT CONSIDERATIONS 290

BRAND ISSUES 296

FINANCIALS 306

INTELLECTUAL PROPERTY 312

PERSONAL KNOWLEDGE 318

PROFIT IMPROVEMENT 324

BUSINESS VALUE AND PERSONAL WEALTH 336

WEALTH & FINANCIAL MANAGEMENT 334

DEBT MANAGEMENT 342

SHAREHOLDER GOALS 288

CREDIBILITY AND JUSTIFICATION 294

EMPLOYEE AND MANAGEMENT ISSUES 300

COMPANY DOCUMENTATION 310

EXPENSE CONTRACTS 316

COMPLIANCE ISSUES 322

REVENUE DRIVERS 328

TAX & INVESTMENT STRATEGIES 340

RISK MANAGEMENT - LIFE & DISABILITY INSURANCES 344

CHAPTER 5

BUSINESS ATTRACTIVENESS 264

EXIT READINESS 278

VALUATION EXPECTATIONS 284

PRODUCT STRATEGIES 330

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EMOTIONAL FACTORS 353

PERSONAL PLANNING 357

FINANCE (PERSONAL WELLNESS ASSESSMENT) 374

PERSONAL EXPECTATIONS 360

FUN & RECREATION (PERSONAL WELLNESS ASSESSMENT) 378

LEARNING (PERSONAL WELLNESS ASSESSMENT) 394

PERSONAL BLOCKS (PERSONAL WELLNESS ASSESSMENT) 362

FRIENDS & FAMILY (PERSONAL WELLNESS ASSESSMENT) 382

ACHIEVEMENT (PERSONAL WELLNESS ASSESSMENT) 396

WORK (PERSONAL WELLNESS ASSESSMENT) 366

ROMANCE (PERSONAL WELLNESS ASSESSMENT) 386

VALUES (PERSONAL WELLNESS ASSESSMENT) 400

HEALTH (PERSONAL WELLNESS ASSESSMENT) 370

ENVIRONMENT (PERSONAL WELLNESS ASSESSMENT) 390

PERSONAL WELFARE - READINESS & ‘LIFE AFTER’ EXIT PLAN 350

SAMPLE EXECUTIVE SUMMARY OF AN EXIT PLAN 402CHAPTER 6

EXECUTIVE SUMMARY (SAMPLE) 404

REQUIRED INFORMATION FOR NEW BUYERS 410CHAPTER 7

PREMISES AND LEASES 412

FINANCIALS CURRENT 414

WHO OWNS WHAT? 418

CONTRACTS 422

EMPLOYEES 426

FINANCIAL FORECAST 416

FULL DISCLOSURE ON THE BUSINESS 421

BUYER CONSIDERATIONS 424

REDUCING RELIANCE ON THE BUSINESS OWNER 428

THE VALUE ENHANCEMENT PLAN 462

THE VALUE ENHANCEMENT PLAN 434

PROFIT IMPROVEMENT AND CASH STRATEGIES 437

MARKETING & BUSINESS AUDIT 465

CHAPTER 8

CHAPTER 10

CHAPTER 9

THE MANAGEMENT SUCCESSION PLAN 430

TIP #1 INCREASE THE NUMBER OF TRANSACTIONS 440

MARKET & BUSINESS AUDIT – THE SIMPLE QUESTION CHECKLIST 466

TIP #3 VOLUME OF CUSTOMERS 446

TIP #5 DEBTOR STRATEGIES 454

TIP #2 AVERAGE VALUE SALE 443

THE DETAILED QUESTION CHECKLIST 476

TIP #4 CREDITOR STRATEGIES 451

TIP #6 INVENTORY STRATEGIES 457

MARKETING 478

HUMAN RESOURCES 492

MANUFACTURING 494

FINANCIAL 500

SWOT ANALYSIS 503

THE MERGER & ACQUISITION PLAN 504CHAPTER 11

FINDING A BUYER 506

HOW TO STRUCTURE THE DEAL 510

MARKETING AND SELLING THE BUSINESS 512

SELLING YOUR BUSINESS CHECKLIST 514

ESTATE PLANNING 346

FINANCIAL PLANNING ADVISOR 348

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SAMPLE DUE DILIGENCE CHECKLIST 516

SAMPLE ONE-PAGE ACQUISITION OPPORTUNITY DOCUMENT 522

SAMPLE TERM SHEET & QUESTIONNAIRE 526

SAMPLE CONFIDENTIALITY AGREEMENT 530

HANDY SELLING: YOUR BUSINESS CHECKLISTS 536

CHAPTER 12

CHAPTER 13

CHAPTER 14

CHAPTER 15

CHAPTER 16

GOODWILL 542

RESTRAINT OF TRADE 544

TRADING STOCK 546

EXIT PLANNING INSTITUTE 549

SAMPLE DUE DILIGENCE CHECKLIST 518

SAMPLE ONE-PAGE INFORMATION SHEET 524

TERM SHEET 528

RECORDS, INFORMATION AND LISTS 540

SAMPLE CONFIDENTIALITY AGREEMENT 532

CHECKLIST 538

WORKBOOK BACKGROUNDThis guide was largely written from over 25 years of first-hand experience in running a business and then working with consultants, accountants and the legal fraternity to buy and sell businesses. It has become almost a life work to evolve, develop and innovate a set of processes that can be used by business advisors and business owners around the world.

From due diligence requirements through to different valuation strategies, I have learnt from all the people with whom I have worked. Throughout this time, I have negotiated with multinationals, and engaged with both professional brokers and the top five accounting firms. I have talked to respected financial houses, brokers, venture capital companies and legal firms – each of whom have added to my thought processes and introduced me to their own methodologies.

I have had the great fortune to meet and befriend many great opinion and thought leaders around the world. Peter Christman, one of the founders of the Exit Planning Institute; Chris Snider, the current President and Owner; and Sean Hutchinson, an extremely generous practitioner, I put high on that list in the USA. All have done significant work in building the industry and have influenced me over the years.

I was so impressed with the Exit Planning Institute’s work in educating business owners that I became the first Australian to fly to Chicago and receive the Certified Exit Planning Advisor Credential (CEPA) and I am now the current President of the Australian Chapter of the Exit Planning Institute. I founded the Institute of Exit Advisors in Australia in 2005 but decided to support an international credential, so abandoned the IEA.

When I first started writing in this area, I found that many of the templates simply did not exist in one workbook and there was no clear step-by-step pathway. I also found there were gaps in fundamental areas relating to educating business owners about the processes – especially in keeping the language simple and practical. I thought it was a real breakthrough when I developed in 2003 the Business Attractiveness and Exit Readiness Index – giving business owners access to a scoring a system.

Over the years, I have given seminars, held workshops and consulted to literally thousands of small to medium-sized businesses (SMEs). I have been at the coalface, and what I have learnt can now be found in the practical checklists that appear in this book. Through my years of experience, I know these checklists are effective in improving the bottom line and hence the sale value of any business. I thank all those that have contributed to my learning journey.

Thank also to the Contributing Editors, and Clare Loewenthal, who in the early days translated some of my videos. I also left some checklists in the back of the book that were particularly good that were developed by MAUS/CCH/EBC Editors over the years.

And finally, thanks to my family – without whom there would be no purpose to what we do in business!

Kind regards,Peter Hickey

MAUS VALUEMAX® SOFTWARE 554CHAPTER 17


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This workbook process:

• Start at the beginning of the workbook and work your way through each module.• Write your goals and objectives at the beginning of the process, but as you progress through the analysis

templates, come back, revisit and update those objectives.• Planning is not a linear process. It should evolve as your business and personal situation changes and as

your thought processes become more mature.• The workbook is designed to promote conversations and discussions with your family, staff, advisors and

other co-owners of the business.• We suggest internal workshops could be used to facilitate discussions with employees and discuss

business improvement.• We suggest you consider appointing an Advisory Board to keep you on track and hold you accountable to

this plan.

LEARNING OUTCOMES

OverviewThis Exit & Succession Planning Workbook is designed to educate business owners and business advisors on the exit and succession planning process and provide a clear yet comprehensive pathway. It is written from the business owner’s perspective.

Whether you, as the business owner, would like to build and sell your business or perhaps transfer ownership to a family member, this workbook will guide you on the best options to ensure the best possible outcomes.

The workbook is the culmination of many years of first-hand experience as well as conversations with business owners, brokers, accountants, lawyers and venture capitalists. It is based on worldwide research of the best practices.

The workbook will help you to implement a series of step-by-step systems and processes. At the end of this analysis, you will understand and hopefully achieve the following:

• Maximum possible sale price for your business.• Maximum personal wealth – before and after the transition.• Maximum net proceeds through good tax planning.• Ensure your business asset will still maintain the maximum value in the case of death or sickness.• Ensure you have developed a ‘life after exit’ plan and you have prepared mentally and financially for this transition.

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WORKBOOK OUTLINE WORKBOOK PROCESS

Exit Planning Institute / MasterPlan / Value Acceleration - Framework

This workbook was designed to fit in with established methodologies in the marketplace. It can be used to complement the Exit Planning Institute Framework and the MasterPlan and Value Acceleration methodologies. At the back of the book we have included a mapping process that maps the modules in this workbook to the above-mentioned methodologies.

What they said!

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“The Maus ValueMax® Workbook written by Peter Hickey is a must have for all business owners who want to leave their legacy and business in a winning style to preserve family, employee and customer relationships. Thank you Peter Hickey for coming through for all business owners, advisors and consultants in the exit and succession planning environment. You have a definite winner for all!” Peter G. Christman, CEPA, Co-Founder of the Exit Planning Institute. One of the most respected M&A specialists and Exit Planning Advisors in the USA, Founder of the Master Planning Institute, and Co-author of The 10 trillion Dollar Opportunity.

___________

“Peter Hickey is one of the greatest innovators in the industry today. “ Christopher Snider, Author & Speaker, CEO/President of the Exit Planning Institute, and author of the best-selling book, Walking to Destiny.

___________

“Peter Hickey has compiled an excellent approach to exit planning which is clear, well-structured and easy to follow....” David Blair MA FCA MBA CF, M&A Corporate Advisor. Member of ICAEW Council and Past President of East Anglia Society of Chartered Accountants.

___________

“Congratulations – this is a monumental and fantastic document....” Kerry Boulton, CEPA Exit Planning Advisor and business author.

WORKBOOK PROCESS

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FOREWORD:A PERSONAL NOTE TO BUSINESS OWNERS FROM THE AUTHOR


18 19Copyright MAUS Business Systems. All rights reserved worldwide (www.maus.com.au) Publication: Peter Hickey/MAUS ValueMax® Workbook


HELPING BUSINESS OWNERS ACHIEVE THEIR DREAMS HELPING BUSINESS OWNERS ACHIEVE THEIR DREAMS

THE UNSUNG HERO

Starting and running a small to medium-sized business is one of the toughest jobs in the country – it’s just plain hard work! If you are a business owner, you are used to long, unappreciated work hours and you know the stresses and sacrifices are plentiful. Running your own business also means your family life and social life are sure to suffer unless you are constantly mindful of the need for work/life balance.

Most business owners rarely take sick leave and they can’t afford extended holidays. A business owner has to wear 20 hats and perform at the speed of five people. It is rare to find a business owner who is not confronted with a major crisis each month. This can be anything from an upset customer, an employee who wants to leave or simply too much to do in not enough time. But they take it in their stride, manage and accept the situation, then move on.

So, why do business owners take on such a challenge? Perhaps because, deep down, there is a feeling of overwhelming satisfaction, perhaps because you are the master of your own destiny, perhaps because you can no longer work for someone else or a meaningless entity.

It could be because you wanted to make a difference or because you are passionate and want to change the world, or because you want to build a culture with your employees and leave a legacy.

Although there is a downside to being an entrepreneur, there is an indescribable sense of exhilaration and achievement when sales suddenly surge and you win a new customer or deal. There is a sense of pride when your employees work as a team and implement the systems you have developed, and there is a sense of satisfaction when you achieve something that no one else has been able to. There is an incredible sense of euphoria when you create a new product that would not have existed without you.

The pinnacle of this feeling for me was on the day I signed the contract to sell my business to a multinational company. It is what dreams are made of. In the early stages of the business, I struggled and almost failed. Any sane person would have given up. Perhaps it was stubbornness or just sheer dogged belief that one day…

At the back of your mind is the dream - the dream only one in 1000 business owners ever achieve - that you can start something from nothing and, through sheer hard work and persistence, build something that makes $1 million or more.

HELPING BUSINESS OWNERS ACHIEVE THEIR DREAMS

We consistently shipped thousands of units of software each year – over 60,000 copies throughout Australia, the USA, Asia and the UK. We redefined the market and developed contracts with major banks, tertiary institutions and businesses. We were listed in the BRW fastest growing companies. We won business awards and I was even named the Ernst & Young NSW Entrepreneur of the Year.

These were all highlights and each was a great experience. But nothing will beat the day I walked into the lawyer’s office and signed the contract to sell MAUS. The day I bought it back for less than 10% of what I sold it came close!

As a business owner, I never lost sight of the big picture and kept creating, developing and evolving. I went from being an uneducated business owner to being quite savvy. When the business started to turn, I pushed harder and worked smarter and, over the next eight years, we developed into one of the most reputable software companies in the world.

Selling your business or transferring ownership is a chance to be repaid for your hard work.

Hopefully, with the benefit of this workbook, I can help you to achieve your dreams.

If ever you use these templates and they do help you to achieve that dream (or even if they don’t), drop me a line and tell me about it. You deserve a pat on the back! Please note however, if I do see you, I have taken the creative liberty of including a picture below of me with a full head of hair... at least I still have the beach!

All the best,

Peter Hickey

PS: One of your goals as a business owner is to understand about building enterprise value instead of focusing on day-to-day profits. This will help you to harvest wealth from the business for you and your family.

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Copyright MAUS Business Systems all rights reserved worldwide ( www.maus.com.au ) Publication: Peter Hickey / MAUS ValueMax® Workbook

BUSINESS OWNER EDUCATION

CHAPTER 1

step



UNDERSTANDING THE NEED FOR EXIT PLANNING




UNDERSTANDING THE NEED FOR EXIT PLANNING UNDERSTANDING THE NEED FOR EXIT PLANNING

OVERVIEWFifty per cent of small business owners in Australia, USA, UK, Canada and New Zealand are now over 55 years of age and this rate is increasing each year. The result is a massive increase in the number of business owners looking to sell or transition out of the business and retire.(1)

Research shows 70% of businesses owners think succession and exit strategy planning is important but only 15% of baby boomer business owners globally are prepared for this transition.(1) In countries like Australia, USA and the UK, where a lot of work has been done on education, this number is higher but still means that less than 20-30% are prepared.(2) In the UK, 45% of business owners either don’t know how they will exit or plan on closing the business once they exit.(3)

In Australia, 64% of business owners would seriously consider selling if approached, and 32% are wishing to retire yet 34% of business owners do not have an adequately funded retirement income.(2) In the USA, 78% of small business owners plan to sell their businesses to fund more than 60% of their retirement.(4) According to the Exit Planning Institute, 80-90% of business owners wealth is tied up in the value of the business.(5)

For those people selling the business in order to retire, it is of paramount importance the sale price will allow you to retire comfortably and not compromise your quality of life.

As these baby boomers near retirement and the average age of small business owners increases, the age-old laws of supply and demand will come into play. The higher the supply, the more likely a downward pressure on price will be applied. It is a myth to think this is an age and retirement issue, as these forces will affect the value of all business owners, regardless of age.

A major impediment to succession planning is that most entrepreneurs don’t understand the drivers that underpin the creation of an exit strategy or the related personal wealth and wellness associated. An exit strategy needs to be achievable and have a realistic time frame and measurable milestones. It also needs to be linked with a business owner’s personal wealth, risk and tax plan and related directly to personal wellness and the ‘life after’ plan.

This book explains the key issues that need to be addressed in an exit plan, so readers can create a document that encompasses the unique features of their business, life situation and price expectations.

Sources:

1 Succession Reset Research Study, Family Business Succession in the 21st Century, Pitcher Partners/Swinburne University.

2 The MGI Australian Family and Private Business Survey, published June 2013.Researched and prepared by Lucio E. Dana and Professor Kosmas Smyrnios, RMIT University, Melbourne.

3 www.mybizdaq.com/small-business-closure-report

4 FPA/CNBC Business Owner Succession Planning Survey, released April 2015.

5 Exit Planning Institute.

6 Australian Bureau of Statistics (ABS), U.S. Bureau of the Census (USA), United Kingdom - office for National Statistics, Statistics Canada, Statistics New Zealand, Statistics South Africa.

Who do you want to sell or transfer your business?

How much is your business worth Now?

Is this enough to retire or move on?

How much would you like to sell the business?

What are your Exit Objectives?

When would you like to sell?

How much would you need after tax to fund your lifestyle?

How could the sudden exodus of baby boomer business owners to retirement force the price of my business downwards?

What can I do about this?

Yes, I understand this section

How much is your business worth now?

Is this enough to retire or move on?

How much would you like to sell the business for?

How much would you need after tax to fund your lifestyle?

When would you like to sell? Who do you want to sell or transfer your business to?

What are your Exit Objectives?

It is not just about the baby boomers and it is not just about the value of the business!

step



HOW TO CREATEA VALUABLE BUSINESS




HOW TO CREATE A VALUABLE BUSINESS HOW TO CREATE A VALUABLE BUSINESS

WHY BUYERS BUY - WHAT MAKES A BUSINESS ATTRACTIVE?

NEGATING RISK FACTORS

The primary reason someone buys a business is to get a return on the investment. Each potential acquisition will be judged on the level of future profits the buyer believes the business can generate, the level of risk attached to reaching these targets and the attractiveness of the industry in which the business operates.

Buyers assess any business through the filter of risk. If the business is well organized and driven by strong systems that make employees accountable, it becomes less risky for a new owner.

One of the first questions a buyer will ask is, ‘Why is the vendor selling?’ and a vendor needs to be able to provide a genuine and consistent answer. There are many legitimate reasons for exiting a business. These include wanting to sell to someone with more resources who can take the business to the next level, selling to someone who is younger and more energetic, or lifestyle reasons such as spending more time with the family or dealing with health issues.

Buyers decrease their risk by carrying out a thorough due diligence investigation and sellers improve their position by being prepared for the scrutiny that prospective purchasers will put the business under. The more prepared the seller, the higher the ultimate price they may negotiate.

One of the biggest issues for buyers is how reliant the business is on the current owner. Research shows this is a legitimate concern, with 40% of business owners claiming the business totally depends on them and a further 44% saying it does to a major extent. However, 71% believe another person could readily take over the business if necessary.

If it appears the goodwill of the business rests largely with one individual, the risk attached to buying the business increases markedly. An exit strategy needs to include a plan to separate the business owner from the day-to-day operation of the business.

Using a tool such as the MAUS Business Attractiveness Score (provided later in this book) is a guideline to how attractive your business is to a potential buyer. You must always consider the reason the buyer wants to invest in your business when calculating your score. This may weight certain criteria in the Attractiveness Index to be more important than others.

Attractiveness will be relevant to the type of buyer and the reason they are buying. For example, an owner/operator acquires a business to essentially buy themselves a job. The average spending of these buyers would be $100,000 to $1,000,000 and any business for sale over this category may be unattractive. A multinational or large company that buys a business for strategic reasons will rarely spend under $1,000,000. A multinational would not look at a business unless it had enough profit and upside to justify the stringent due diligence, legal and accounting fees.

Within the owner/operator category, there are essentially two types of buyers. These include buyers who are purchasing for leisure and hobby reasons and those who are buying to get ahead.

The former will be made up of people who are reasonably well off and are either in the twilight of their careers or are looking to take it a bit easy. They are essentially looking at buying a job in an industry in which they enjoy working. They want good profits and a job that is not stressful in a situation where they don’t need to work too hard.

A business that manufactures and sells ecologically friendly products for example would have struggled 20 years ago, but in today’s environment, there is a great deal of marketing mileage to be made from an ecologically responsible product or service.

The first criterion a potential buyer will look for is a sound financial history. Ideally, the business will have recorded a steady increase in profit for the last two to three years, with a similar increase in revenue over the same period. If the profits and revenue figures are inconsistent or showing a downward trend, it may be better for the entrepreneur to delay putting the business on the market until the financial results improve.

Attractive or valuable businesses can demonstrate a proven track record of success. They ideally have an established customer base, sound internal systems, market awareness and credibility, an operational framework and good cash flow.

Potential buyers are reassured if they see the business has solid systems and processes in place. The goal is to eliminate reliance on any one business owner (or key person) to the extent that the absence of the previous owner will have almost no effect on its operations. A good starting point is for a business owner to look at what he or she does for the business and identify other staff members who have the potential to take over specific responsibilities.

Industry trends also influence buying decisions and business value. For example, businesses that operate in a growth market will usually be more valuable than businesses that operate in a less buoyant industry as they have higher chance of continuing to earn the same or more profits.




HOW TO CREATE A VALUABLE BUSINESS HOW TO CREATE A VALUABLE BUSINESS

Owner/operators who are buying to get ahead will be after maximum returns. Their choice of industry is dependent upon growth, profitability and their experience. They are not concerned about working hard or long hours as long as there are solid returns.

A strategic investor (a large business that buys another business) is generally looking to either expand or eliminate a competitor. They might see the strategic benefits of the following:

• Products or services to add to their base• Intellectual property• New distribution channels• Locking in supply• New ways of approaching customers• Management expertise• Brand expansion• International expansion• Competitor buyout• Employee skills

In the context of your industry, would you class yourself as an A grade business or a D grade business?

What could you do to make your business more attractive and sell for more?

IMPORTANT POINTS:

We have included in the book two detailed assessments you should complete. These are the MAUS Business Attractiveness Assessment and the Exit Readiness Assessment. Score your business out of 100.

Certain factors provide the potential buyer with security:

• Ensuring there is a sound financial history. • Records of a steady increase in profit for the last two to

three years, with a similar increase in sales over the same period.

• Positioning the business as a good, low-risk return on the investment.

• Highlighting an established customer base, sound internal systems, market awareness and credibility, an operational framework and cash flow.

• Highlighting positive industry trends.• Highlighting company awards, testimonials or even an

ecologically responsible product or service.• Ensuring the business does not appear to be reliant on

the owner and that there is a succession of employees who could take over the existing owner’s job when he/she departs.


Important PointsAn educated business owner...

...is almost guaranteed to significantly increase the value of the business.

step



PERSONALCONSIDERATIONS




PERSONAL CONSIDERATIONS PERSONAL CONSIDERATIONS

PERSONAL EXPECTATIONS

FINANCIAL CONSIDERATIONS

Before deciding on the best way to exit a business, it is important to consider the reasons for this transition. Some people will retire, some will take an extended holiday and some will re-enter the workforce as an employee. Others will buy another business or establish a new venture. Research shows that 52% of small business owners planning to exit their business intend to retire, and 14% intend to start another business. It is important that business owners think about the journey, not just the destination. Make sure health and wellness is a priority even in the building phase of the business. A strong, healthy body means a strong, healthy mind.

Industries and businesses are subject to economic cycles and, at certain times, businesses will perform better or worse, depending on the business cycle. Ideally, a vendor should sell when industry conditions are good but it is sometimes difficult to pick the top of the market. In many cases, industry cycles will be less important than the personal reasons for selling.

In some cases, an entrepreneur becomes burnt out, faces illness or is forced to exit a business for personal reasons. This can result in a sale needing to be completed by a certain date and/or at a reduced price, which is obviously not desirable. Like so many facets of business, the key to a successful sale or transition lies in careful planning.

Most buyers will require the seller to have some involvement in the business after the sale to ensure the intellectual property, staff and customer loyalty are smoothly transitioned. If a buyer considers a handover period too narrow, the perceived risk increases and this will be reflected in the price on offer. It is important that the business owner(s) factor into their exit plans a possible 12-24 month earn out should the business be sold to a strategic investor.

Before selling, a vendor needs to calculate how much money is needed from the sale to sustain a desirable quality of life for the owner.

This is particularly true of owners planning to retire, as they need to consider the likelihood of increased medical expenses and the future possibility of needing assisted living. There is a large percentage of business owners that have retirement income funds below the national average and below the level needed to support themselves.

Many younger people sell a business with the intention of buying or starting another enterprise. In these cases, it is still important that the proceeds from the sale are sufficient to fund a new business, maintain a happy lifestyle and possibly to have an extended break before starting a new venture.

In some instances, the new proprietor will want the business owner to work in the business as an employee for an agreed period of time. The transition from owner to employee is not always an easy one. Relationships with other staff members need to be redefined and the seller is required to accept the changes made by the new proprietor.

When considering a business owner’s involvement after the sale, it should be noted that sometimes there are significant cultural differences between a large and small business. If a small business is bought by a bigger entity, tension often arises when a former owner needs to conform to the practices of a larger corporation following the sale. For the former owner, this can create a considerable emotional burden during the transitional phase.

It may be better for the vendor to act as an advisor or consultant to the business, where the buyer is able to still draw on a thorough knowledge of the business operations and the industry and to receive strategic advice. The advantage of this option is that it provides a regular stream of income for a period of time after the sale, without the restrictions of full time employment. This provides the seller with time to develop new hobbies or business ventures.

Sellers also need to consider their vision for the business. Most owners have an emotional attachment to a business that has been their ‘baby’ for many years and has become part of their identity. They want the brand and the business to thrive after their departure, which means sometimes a certain type of buyer might hold more appeal.

Before embarking on this exit and transition journey, a business owner should sit down and think about themselves. Who are you as a person? What are your values? Do you want to leave a legacy or reward, or take into account anybody else’s welfare when exiting? When you exit, will you retire, buy another business or work? Will it be paid work or volunteer work? What hobbies/activities will you have? What are your commitments with friends/family? What study or self development will you take on? What investment projects/new business ideas/revenue making projects, concepts or ideas will you take on?

“I wish I had spent more time building my business and accumulating wealth!”

“I wish I had of spent more time with my family and enjoying myself!”

Personal Goals - Should they take more priority in your planning?

Look at the two cartoons below. What do you think is more likely that person would say in their dying breath? What implications does this have for you when thinking about your wellness and exit plan?




PERSONAL CONSIDERATIONS PERSONAL CONSIDERATIONS

Screenshot from the MAUS ValueMax® software that demonstrates the amount of cash you will need to retire.

The above illustration assumes a scenario where a 50-year-old business owner sells his/her business for $877,000 after expenses and tax. If he/she earns 5% interest per annum and spends $84,000 on their lifestyle every year afterward, the cash will run out when the business owner is aged 65. Therefore, the business owner needs to consider spending less each year, selling his/her business for more or make the money work harder in an investment fund. This assumes the business owner has no other personal wealth that will generate an income.

Always seek professional advice from a qualified advisor!

What will you do when you exit your business?How much income will you need to afford this lifestyle?

How can you improve your health and wellness right now?

Look at the road map below. Do you have plans in each of these areas?


Important Point

Business owners also need to take into consideration whether the sale will leave them free to earn a living. Many buyers will insist on a restraint of trade clause in the contract, which restricts the seller for a period of time starting a similar business. This can also restrict the seller’s ability to work for a competitor, disclose confidential information or poach clients and employees. These restrictions need to be compensated for in the sale price.

IMPORTANT POINT:

Complete the two detailed personal assessments that have been printed in Chapter 5. The Personal Wellness & Life After Assessment and the Personal Wealth, Tax and Risk Assessment.

Complete these assessments and score yourself out of 100.

HOW MUCH DO YOU NEED TO SELL YOUR BUSINESS FOR?

step



START WITH THE END IN MIND




START WITH THE END IN MIND START WITH THE END IN MIND

The question I am often asked is… “When should I start planning for the exit of my business?”

If you understand these seven simple truths in this section, then it is logical the preparation of an exit and succession plan should commence right now! Even ensuring you have the basics covered in a plan is almost guaranteed to benefit you and the business.

1. All business owners will need to (one day) exit the business. 2. All business entities have some value (even if it is net assets) that can be sold or transferred to someone else.3. Preparing in advance for this event will significantly increase the value that could be transferred.4. Preparing in advance for this event will significantly increase the probability of a successful outcome.5. A business built for exit (and maximum value) will be a better run business that will allow you to make more

profit and reduce your stress.6. Planning for exit means personally planning your finances and your ‘life after’ plan, which will result in

improved personal wealth and happiness.7. The value of a business can, in some cases, be over 50% of the business owner’s personal wealth. Therefore,

we have a responsibility as a business owner to think carefully about this transition, for the sake of ourselves, the family, and other stakeholders.

When should you start planning for exit?

Which of the seven truths resonates with you the most?


THERE IS A 100% CERTAINTY THAT YOU WILL NEED TO EXIT YOUR BUSINESS!

More cash as the business grows, putting better systems in place, and scale marketing and sales.

POSSIBLE INVESTOR STAGE

Ideally, market conditions being positive will add to business value.

Marketing and sales start to work, shoestring budget as cash going to advertising, marketing and early growth infrastructure, and the big jump – it’s time to hire people!

THE GROWTH PHASE

THE TRAGEDY PHASE

No real plans, low energy levels, losing passion and motivation. Business sales start deteriorating. You just want out!

Too many business owners wait until they are here to sell the business.

Start recruiting employees.

Be prepared – death, sickness and disability

can hit at any time.

Positioning the company to increase value, personal wealth and personal wellness. Start the sales process to exit.

THE IDEAL SELL YOUR BUSINESS PHASE

THE SCALE & SYSTEMISE PHASE

BUSINESS AND PERSONAL EXIT LIFECYCLE

THE SEVEN SIMPLE TRUTHS

THE NIGHTMARE PHASE

THE SURVIVAL PHASE

Offering whatever it takes to survive, a couple of things start to work.

Reality check/frustration. People don’t want what you offer; no cash; can’t adapt, no Idea, depression

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Copyright MAUS Business Systems. All rights reserved worldwide (www.maus.com.au) Publication: Peter Hickey / MAUS ValueMax® Workbook

PLANNING STARTS WITH KNOWLEDGE – UNDERSTAND THE ‘WHY’




PLANNING STARTS WITH KNOWLEDGE – UNDERSTAND THE ‘WHY’ PLANNING STARTS WITH KNOWLEDGE – UNDERSTAND THE ‘WHY’

The best way to exit the business is to start planning years before. As a business owner, you need to begin a learning journey. The more educated you are, the better your plan and the better the outcomes.

If we plan for these events, we are going to have a far better chance of creating maximum value in the business and looking after our personal welfare and wealth as we transition. It will also help us to manage our exit in case of unexpected events such as divorce, disability and death. The key points of your Exit Plan should be included in your Business Plan.

You must understand the ‘why’ of your exit plan. The exit and succession plan for each business owner will be different for a myriad of reasons, including individual personal wealth and health circumstances, outlook on life, family circumstances and the type of the business.

Below are some typical transition pathways that include forced and non-forced exit events:

Non-forced events (Bad)• The business owner has a lack of passion or motivation to continue.• The business is causing the business owner headaches and stress and he/she just wants out.• The business model is breaking down and sales and profits are going south.• The business owner does not have access to enough capital or resources to compete effectively moving forward.

Forced events• The business is failing or even going into liquidation.• Unexpected events such as marriage breakdown, death, sickness or disability.

Non-forced events (Good)

• An offer ‘too good to refuse’ is made to buy the business.• The business owner wants to transition into retirement.• The business owner wants to transfer ownership to family members.• The business owner has been offered a job or opportunity elsewhere and wants to move onto a new era of his/

her life. • The business owner uses the sale as a means of risk mitigation, i.e. cashing in whilst the going is good, before

markets change, new competitors enter the marketplace, or circumstances change.

!

STARTHERE Exit Plan Exit Options

RETIREMENT

BUSINESS STRATEGY

Just Ahead

Exit Objectives

Personal Wellness

Insu

ranc

e

Wealth Mangement Estate Planning

Business Value

Exit Readiness

BUSINESS READINESS

OWNER READINESS

Profit Growth

Exit Decision

R.I.P

EXIT PLANNING ROADMAPwww.maus.com.au

!

STARTHERE Exit Plan Exit Options

RETIREMENT

BUSINESS STRATEGY

Just Ahead

Exit Objectives

Personal Wellness

Insu

ranc

e

Wealth Mangement Estate Planning

Business Value

Exit Readiness

BUSINESS READINESS

OWNER READINESS

Profit Growth

Exit Decision

R.I.P

EXIT PLANNING ROADMAPwww.maus.com.au

• What would happen to your business if you died tomorrow?• What percentage of your personal wealth does the

business make up?• What percentage do you think it could make up if you worked on a plan to increase your business value?

IMPORTANT POINT:

If you know it is a certainty that at some stage you will need to exit the business, then put a plan in place TODAY to ensure the likelihood of a successful transition.


Important Point

Documents

THE VALUEMAX WORKBOOK - maus.com.au