Fire-sale: Plan to keep up value

If your business gets into serious trouble and you have to sell, you will best maintain value by having the right plan. By TOM McKASKILL.

By Tom McKaskill

Having an emergency exit plan can only stand you in good stead, should the unthinkable happen.

Few businesses can guarantee that they will never get into trouble. Early stage companies frequently fail in the first few years, but even large corporations have been known to disappear.

Look at the household names which failed – Enron, Ansett, Worldcom, HIH and so on. Of course, if you do get into serious trouble, then just getting enough cash in the door to cover payroll can be a challenge. At the same time, staff will be deserting, suppliers will be hounding you for payment and you will be chasing customers. Not a great time to start thinking about selling out.

The truth is that many companies end up on the auction block at the worst possible time, sometimes due to their own failures but often just because external events went against them. Whether it was a change in industry regulations requiring a major investment, a new aggressive competitor or a natural disaster, there are many events and circumstances that can derail a business. Planning for such an eventuality should consider the possibility that the business should be sold to recover as much of its value as possible.

However, it is very difficult to sell a business when the business itself is under pressure. The executives will be busy fighting fires and there will not be time to identify and court prospective buyers, or time to engage the best advisers.

Clearly, if you haven’t put the time in to develop a robust exit strategy for this set of circumstances, you will have left it too late to be anything but a fire sale.

Value in a business is related to its potential in the hands of the buyer, thus even a business heading for insolvency can be a great acquisition for a buyer who is not constrained by the situation facing the vendor.

The key to a quick sale, which still gains a premium on sale even when the business is in trouble, is to have identified in advance those buyers who can develop the underlying potential in the business. The entrepreneur should set out to identify a small group of such buyers, engineer a situation where those prospective buyers are informed of the potential in the business, and then kept up-to-date with the progress of the business over time.

The aim of the entrepreneur should be to have each prospective buyer understand what they could gain from an acquisition when the entrepreneur wishes to sell.

Of course, in the unfortunate situation where the entrepreneur is forced to sell, it would be much better if he or she could quickly bring into a competitive bid a number of prospective buyers who were already apprised of the potential of an acquisition. The competitive bid process should then protect as much of the value in the business as possible.

As part of the preparation for such an event, even if unlikely, the business needs to be put on a basis where the buyer can quickly undertake due diligence. This means that the business has to be fully prepared for such an investigation.

If the entrepreneur has also ensured that the business is run effectively and efficiently and has few risks for the buyer, the due diligence process will conclude quickly and the buyer will be more willing to negotiate a deal.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.