Enticing buyers

Appointing a board prior to the sale of a business can prove advantageous in attracting potential buyers and future investors, writes Alexandra Cain.

Putting in place a board of directors was one of the first steps taken by the private equity firm that bought a 50 per cent stake in Jason Hedge’s business Decoglaze. The company specialises in glass splashbacks and other glass products.

“Their philosophy was that as investors, they want input into the business. They are a group of very experienced business people and I value their thinking, especially as I have run the business myself for 17 years,” says Hedges.

The board comprises three members from the private equity firm, Hedges and two directors he appointed.

“We meet monthly and work to a prepared agenda. I chair the board, because I know the business better than anyone. The meetings only take an hour and a half and we really focus on the bigger picture,” Hedges explains.

He says it is to the business’s benefit that people from outside the day-to-day running of the company have input to it. “They put a different spin on what I’m doing and they are available any time I need to talk to them. We set goals and targets and we’ve grown 25 per cent in the last year.”

Indeed, one of the main goals has been to grow the business and Hedges says the board’s advice has been invaluable in helping the company to achieve sustainable growth.

He says he didn’t set up the board before the business was sold because he didn’t really know how to approach it. But he would advise any business to consider putting in place a board. “As a business owner, you don’t spend enough time thinking about the business and having a board makes you step outside the day-to-day.”

Too few smaller businesses consider putting in place a board prior to a sale. But a board can add value to a business and in some cases, make it more saleable.

Zoran Sarabaca, an associate with business brokers Xcllusive Business Sales, says there are benefits to forming a board and implementing governance systems before selling a business. But he says most buyers are focused on other factors than whether a business has a board.

“When buying a going concern business, in most cases, buyers are looking for future sustainable profits. But having a board in place will help with the operation and governance of the business and the sustainability of its profits. It’s also a sign operations will continue without interruption after the business is sold and the original owners leave the business,” he says.

Sarabaca says buyers will be able to undertake more comprehensive due diligence through examination of board reports.

“Having a board could also provide an opportunity to keep the existing owner as a part of the board, which allows the purchaser to benefit from the vendor’s experience post-acquisition. Although this is not always possible and does depend on the seller’s plans post-business handover,” he notes.

Board value

Tony Arena, principal of BCI Business Brokers, says buyers look for three elements when considering a potential acquisition.

“First they want provable profit. Second, they want profits to be maintainable. Third they are looking for transferability of operations,” he says.

Arena says this third factor comes down to whether the business is able to maintain its profits post-acquisition. This is where a board can potentially add value.

“Buyers look at the importance of the current owner in the business as well as the effect of the exit of the owner on the business. If you have more people other than the owner who are prepared to stay with the business post-sale then you reduce the effect of the owner leaving,” he says.

Too few smaller businesses consider putting in place a board prior to a sale.

But ultimately, says Arena, the main factor that will increase the value of the business for the vendors is reduction of risk. “An external board is one way to demonstrate the infrastructure will survive the sale. So a business is more saleable and more valuable when it has a board and there is less risk of repercussions after the sale.”

However, he notes that any decision to appoint directors will reduce the business’s profit as a result of having to pay directors’ fees. This must be considered as part of the sale process.

“It’s an investment you want a return from, through enhanced accounting and legal compliance and proper protection of the business’s intellectual property,” says Arena.

Susan Rix, a partner with accounting firm BDO, says in her experience there is no correlation between having a board and achieving a business sale. “Although a board can add value to strategic direction and assist the purchaser to understand operations.”

Nevertheless, one of the main benefits of having a board in place with an independent director is a potential premium for the business, even indirectly.

Says Sarabaca: “We have seen a rise in the number of investment groups that are taking an interest in smaller businesses. One of their requirements is for the business owner to have a key position in the business or for the owners to stay with the business for an extended period of time after purchase. These groups customarily establish a board post-purchase if one is not in place already.”

He says having an established board in place with an independent director opens the opportunity to sell the business to these investment groups. It also means the business could be sold to other investors who don’t want to be involved in day-to-day management and who could potentially make the business a more passive investment. “Having a board could increase demand for the business and, because of that, help the seller achieve a higher price.”

Having a board in place could also assist investors to feel more confident in purchasing the business. This is especially the case if the board in place is functioning well and has a proven track record. However, in smaller businesses it could also have an adverse effect: if the new business owners want to be hands-on they could see a board as an obstacle not a benefit.

In terms of the board’s role in achieving the best price for the business, Sarabaca says this will depend on the structure of the board and the directors’ experience.

“Most boards will bring great benefit during the exit to owners with their legal, commercial and tax structure experience. But with the business sale process, it is my experience that boards and advisers, such as accountants, will make the same errors as would the business owners, such as overpricing the business, being too concerned about confidentiality and negotiating with only the buyer. At the time of the business exit, good practice for the board could be to recruit a board member with business sales experience,” he adds.

Nevertheless, Sarabaca doesn’t think a board should be formed specifically to help with the exit strategy, especially in the short term.

“The advantages of a board are many, [and] could benefit owners at the time of exiting the business. But for the board to have maximum benefit during the business exit it needs to have a proven and successful track record over considerable time.”