Knowledge

Over the next few months we will be demystifying the sales process and taking you through, in our mind, the key steps that a business owner needs to take in order to take their business to market. 

Whilst it sounds counterintuitive, the first step is to understand or know your potential buyer. If you get this wrong it can have serious impacts on the ultimate sales price and the return of investment to the shareholders. 

Types of Buyers 

There are 4 main types of buyers (or acquiriers) who buy businesses. Whilst this is not an exhaustive list of potential buyers these 4 represent the majority of buyers involved in deals. 

1. Private Buyer 

A private buyer is an individual who is looking to own and operate a business. Typically these buyers have limited budgets and will likely be using finance to fund part of their purchase. It is very common to see private buyers acquire businesses with EBITDA below $1M. 

Common Deal Metrics 

Summary 

A private sale is a very common way for owners to exit and is a great option for owners if they do not want to be actively involved post transaction. The downside is that they generally do not get any ‘upside’ of the deal and the deal size is limited to the budget of the individual.

1. Trade or Industry Acquirer 

A trade acquirer is a company who is generally in a similar industry as the seller or who wants to enter into a new market and sees the seller as a strategic acquisition. These entities usually have a Merger & Acquisition (M&A) strategy to assist in top line and bottom line growth when moving towards a strategic outcome which could include a public listing or selling themselves. 

Common Deal Metrics 

Example - Healthia’s acquisitions

On 8 September 2022 Healthia announced that it was acquiring 3 clinics which would generate an additional $1.87m in EBITDA with the purchase price being 4.4x EBITDA comprising upfront cash and shares. 

Summary 

A trade sale is a very common way for owners to exit and is a great option for owners if they do not want to be actively involved post transaction. The downside is that they generally do not get any ‘upside’ of the deal. 

1. Private Equity 

Private Equity is a broad term that describes the management and deployment of pooled investment funds for a specific purpose, usually the acquisition, growth and realisation of a business.  

Private Equity companies are entities who are seeking to make money in their own right. They are paid and incentivised to increase the return to their investors. Usually this is an upfront % of funds under management and then a % of ‘carry’ which is the remuneration linked to the performance of the asset. This means that any acquisition they make they need to see a growth trajectory or a clear pathway to realisation. 

Common Deal Metrics 

Example 1 - Belay Capital’s Acquisition of Maths Pathway 

Belay Capital acquired just over 50% of Maths Pathway for around $12M valuing the entity at around $24M. 

Example 2 - Pacific Equity Partners Acquisition & Pending Sale of Patties Foods 

PEP acquired around 75% of Patties for $245M. It sold and leased back $141M of real estate assets and now looks to be selling the business for around $500M. 

Summary

A sale to Private Equity can be a life changing process but it does come with expectations of involvement and the understanding that someone else is ‘running the business’. Owners also need to be conscious that as Private Equity relies on investors they tend to have more stringent ESG requirements and therefore their investment thesis can be limited. That being said, the benefits of utilising PE can be extraordinary if deployed under the right circumstances.

1. Family Office 

A Family Office is a privately held entity that handles investment management and wealth management for a wealthy family or families. They can be both single or multi family offices and usually involve the management of $100M+ of assets under management. 

A Family Office is a professional investor like Private Equity however their investment thesis is usually tailored to their own investment likes and dislikes. 

Common Deal Metrics 

Summary 

A sale to a Family Office can be a life changing process but it does come with expectations of involvement and the understanding that someone else is ‘running the business’. That being said, the benefits of utilising a Family Office can be incredible especially if the investment thesis of the Family Office and the owner align. Family Offices tend to have a ‘patient’ capital approach and can be less stringent on ESG requirements which can be advantageous in more traditional industries. 

Concluion 

It is critical to understand who your potential buyer is when preparing a business for sale. For example if you take the same business and EBITDA and apply the different potential buyers, you end up with potentially very different valuations. This can result in a major difference in value for the owner. 

Understanding what each potential buyer wants to see in a business is critical. At Frank Law + Advisory we have deep connections with different buyers and understand how to prepare a business for sale to attract the appropriate buyers. 

If you would like to understand whether your business is Exit Ready or what your business could be worth to a potential purchaser, please reach out to James Frank at jfrank@franklaw.com.au or james@frankadvisory.com.au