How do you value a business? How do you engage with the right buyers? We asked Michael Kerr
How do you value your business and engage with buyers? It’s a question all owners looking to sell a business need to start thinking about now. Eden Exchange recently talked to Michael Kerr, founder and managing director of Kerr Capital, a leading Australian advisory firm specialising in business sales, valuations, exit planning and acquisitions.
Thanks for speaking with us Michael. Can you tell us a little bit about your background and career history? What brought you into the field of business sales and advisory work?
Great to be here and thanks for the opportunity to talk. I founded Kerr Capital in 2003 after deciding that I wanted to build my own business advising other business owners. Just prior to that, I had 3 years in a startup called Freeonline / Sharinga which raised $120M AUD over 3 years. I ended my time there as CEO of the Australian business. That was an exhilarating ride where. For the first time, I saw what a group of motivated people could really achieve. Before starting that business I worked in banking, accounting and funds management. Common to all of my roles was direct exposure to a lot of small business owners. I always received a buzz out of meeting and talking to them about how and why they got started? How they maintained their motivation? How they overcame their biggest challenges? From those conversations it became clear that running a small business can be very lonely for many owners. They wanted quality advice about their business that also referenced their personal situation. I thought I could provide that and that’s how I started.
What areas does Kerr Capital specialise in? What markets do you focus on?
Kerr Capital has a focus on businesses worth between $500K to $5M. More of our work would be with service based businesses, especially professional services. If the business has IP or a brand that differentiates it from competitors, we’re always keen to discuss how we can work with them, even if it’s not a service business.
Less than 50% of the work would be business sales. The balance is acquisition (finding and targeting businesses) and a lot of advisory work covering exit readiness / planning and valuation.
How do you match a buyer with the right opportunity?
When we take on a sale we really dig deep on the business and its owner(s) to make sure we understand why they are selling and what the business is and could be. It’s the same for matching buyers with the right business. We try and understand what a buyer wants (business type, size, timing, growth aspirations etc) and what their capabilities are to run the business. If a buyer has clear criteria, and a realistic timeframe, for the business they want then it becomes a lot easier to help them. We can then identify businesses that look like a fit and assess them really efficiently.
Most of the businesses we identify aren’t actually advertised for sale. So it can take some skill and time to convince an owner (potential seller) to engage in a discussion with us. But the reality is many owners will consider selling but haven’t got around to do anything about it yet. There are exceptional opportunities out there. These ‘off-market’ transactions aren’t a new idea in medium and large businesses. But for a whole host of reasons I think there are owners at the smaller end of the market who would rather sell this way and avoid exit planning, advertising and other costs.
What advice do you have on positioning a business for sale? What’s the key message you tell your clients?
I think the best piece of advice is to think about who the best buyer(s) is and look at your business from their perspective. For many businesses there are a range of potential buyers, ranging from competitors to suppliers to customers. All will have a reason to buy your business but there will usually be one who can pay more because they have the biggest upside. This doesn’t mean they won’t negotiate hard on the price. It just means that with a greater understanding of the different potential buyers upside you can negotiate more effectively.
I think the key to getting the best possible result when positioning a business is to work as much on potential buyers as it is on the business. You want to avoid ‘commoditising’ the business and assuming its got the same value for all buyers. To do all of what I’ve outlined you need to allow time to properly prepare. The more time you have the better.
What major industry trends you believe buyers and sellers should be aware of? How has marketing changed in the field?
We aren’t seeing it yet on the major business sale websites but sellers need to respond to the potential for a lot of businesses (the baby boomer business tsunami) to hit the market over coming years. If that happens you could get left without a buyer. It may be that a lot of these businesses don’t advertise themselves and instead sell off-market. Either way sellers need to prepare better to get a good sale result. If you allow 12-18 months for preparing then you will be well positioned and also allow time to actually fix problems in the business.
To offset that a little I think the continuing uncertainty of employment will drive more employees to want to buy their own business to secure their future. Same goes for employees buying out or into the business they currently work in. This idea is gathering pace so owners need to think about their key employees as potential buyers.
There are also a range of platforms like Eden Exchange that are doing a great job of better connecting sellers with buyers and/or even investors to help grow. So the idea of selling a part of a business or selling over an extended period of time can more easily be achieved.
What advice do you have for a business owner looking to value their business for the first time?
Firstly business owners need to understand that it’s hard, even for business valuers, to get quality data on values for small businesses. There aren’t many credible public sources out there. Secondly they need to cautious with any information they might hear from someone else about what they got for their business. A good example is when an owner sells their business on an earnout – while they might have gotten a multiple of say 4 they forget to tell the rest of the story i.e. they have to stay for 4 years to get all their money. This is a regular source of confusion.
In some industries there are reasonably well understood rules of thumb that can help e.g. pricing of accounting fees.
At a more general level the more experienced buyers still evaluate business based on a multiple of earnings approach. For small businesses it can range from 1x to 4x earnings. There are always exceptions but if I’m advising an owner on potential value we usually start with this approach.
The formula is pretty straight forward but it’s what you can credibly put into the formula that counts. If business owners want to maximise the value of their business in a sale they need to understand the inputs to the formula which are one, the sustainable earnings base and two, the multiple.
Getting to a sustainable earnings base always involves a lot of adjustments like commercial salaries for working owners because the financials often mix up business and personal items. This adjustment process is generally not well understood. The best advice for owners is to be able to understand what adjusted financial return a buyer can expect, as opposed to what the current owner takes out of the business.The sustainable earnings can incorporate some future potential if the forecast is credible and you hit these forecasts while the sale process unfolds. Increasing the multiple, the second part of the formula requires significantlymore time and effort but the payback can be very large.
In your opinion, what are the key factors separating good brokers and advisers from average ones?
The transition of any business, big or small, from one owner to another is a highly complex project.
I think the better brokers and advisors understand their clients businesses at a much more detailed level. As a result they will be able to better advise the owner. This means positioning yourself as an advisor and being comfortable charging for advice and not just a broker, who will take a fee if and when the business sells. The industry is fundamentally compensated on incentives i.e. no sale no fee. I don’t think this model lends itself to preparing businesses properly and allowing enough time for the sales process to draw out all the possible buyers. Don’t just rely on traditional advertising to identify buyers. You need to actively identify and chase down buyers using direct approaches and other non-advertising based strategies like PR. Understand and counsel the owners. You have to take on this role as you will be the one advisor who has seen it all before and will be there with the owner from start to finish)
Stand up and project manage the sale process from start to finish. There are usually multiple advisors on both sides and they will take the lead at various points e.g. a Lawyer when the contract is being drafted and negotiated, but someone needs to lead to ensure the sale is completed.
What’s the best thing about your job?
Meeting lots of business owners and getting insights as to what drives them is what I enjoy most. I end up seeing lots of different businesses and industries.
I also get a lot of enjoyment from talking to business buyers who don’t want to stay employees. We hear a lot about the baby boomer business sale tsunami and I’m looking forward to working witha lot of buyers to acquire and revitalise these businesses, rather than having to start them from scratch.
Thanks for your time Michael.
Kerr Capital was established by Michael Kerr (B.Comm, MBA) in 2002 and provides services and advice to help business owners:
- Increase the value of their business (current);
- Find and evaluate their new small business (prospective);
- Improve the saleability of their business;
- Successfully convert their business value into personal wealth.
Contact Michael on 61 (0) 416 213 300 or firstname.lastname@example.org.