0411 888 148 tarena@bci.net.au

BCI is indebted to Nathan Isterling for his contribution to our knowledge base in the area of selling a business. Nathan is one of Australia’s most successful entrepreneurs. He has created businesses and invested in business, and what is more, he has been able to sell them. Nathan emphasises the point that the time to start thinking about selling your business is now.

“So you want to start a business. The statement people usually make about starting a business is that you need to be passionate about the business. For most people the core has to be something that is close to their heart. In my case it’s usually not the product but how it’s produced and the technology involved. I co-founded footytips.com.au which became the largest sports social network in Australia with over 600k participants – but I was never into watching football! My point is that you don’t need to be passionate about the product you just need to be passionate about some part of the business that makes it distinct.

Before you start a business


Before starting a technology business, according to Peter Thiel (founder of PayPal and early investor in facebook amongst other companies) from his book ‘Zero to One’, a business must have all or most of these things:

  1. New breakthrough technology
  2. Good timing
  3. Monopoly on the market
  4. A good team
  5. Proper sales and distribution
  6. Durability in the market
  7. A secret that will meet a need that others do not see.

You won’t of course start out with all of these these things but if you plan to create them within a short time frame you will have a solid business. In most cases, if you are a market leader in a category, it will be more valuable to another company. Before committing to a business I always look for businesses that would gain the most by acquiring my business. Often the business for sale might not be tremendously profitable, but the user base and/or technology represent ‘strategic value’ to another company. Strategic value just means that it’s valuable to a particular company because of it’s situation. For example ESPN bought footytips.com.au because the combined traffic across both websites would allow ESPN to claim a leadership position in the category of online sports media. For Punters.com.au, NewsCorp wanted to use their enormous media network to scale the Punters brand and products. Define your category and ask yourself what company could benefit from it most. Often it’s not obvious.

Multiples


You probably hear a lot of people saying they sold their company for 10x EBITDA or 3x revenue. Technology businesses are rarely bought for their financial performance. These ‘multiples’ are simply guides or benchmarks and often arbitrary to the motivations of the buyer. The models used by acquirers will contain calculations based on scaling the business using their leverage points. For instance when Google bought Youtube, which at the time was losing millions per day, the price paid would have been somewhat justified by how much money they might make in the future, once they introduced advertising and drove traffic to the site using the huge power of Google’s search engine. Funny side note: I heard that Youtube is still a loss making division. Does this make Youtube a bad buy? In my opinion it was a great buy for Google since it forms a vital part of the Google product suite and ensures users stick around their network. And what if Yahoo bought Youtube? What would that have done to Google’s market power in the looming video ad space. Which leads me to the most important part of the selling process, creating competitive tension.

Competitive tension


If you have been to an auction you have experienced competitive tension. Bidders arrive with the most disciplined intentions but then fall victim to the rush of ‘needing the deal’ and the fear of missing out! There is no difference between the human behaviour at an auction for real estate and the sale of a business. The price for a business will always be driven higher with competitive tension – meaning more than one interested party. Sometimes just the idea that another party is interested in acquiring a business with raise price expectations. But when 2 parties are bidding against each other with knowledge or suspicion of who the other party is, you have the best recipe for the highest price. What you are looking for is being able to provide justification to the buyer to increase their bid. The simplest way is another bidder has just outbid them!

The best way to start the process is using a third party to announce to the market that your company is now entering a competitive process to sell your business. The key to this process is that all parties are aware that the vendors are approaching everyone they think will be interested and asking for bids by a certain date. This date often extends but the important thing is that the pressure is on and if they don’t participate they will miss out. I’ve always used a third party to sell my businesses. It allows you to keep focussed on your business and keeps you objective by having a third party question all of your decision making.”

We must agree with Nathan’s concluding point. It is important that you appoint someone who can help you through the sales process.

Who to see

Help you value the business
Speak for you and negotiate on your behalf
Manage and reduce risk through the process

If you’ve ever wanted to grow and sell a business see here for more information.

Download your free PDF today for more info on growing your business.

BCI would love your comment and for you to share this article. Successful Australian entrepreneurs need to spread their wisdom and you can help.

Tony Arena

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