Has Myer really created value?With the investment world buzzing with excitement at one of the largest floats of the year, has Myer really created value for its owners? And what lessons can small business owners take from this?
Most business owners know the score when it comes to private equity – invest in a business, turn the business around then sell the business for a capital profit. Typically equity investors want to double or triple their investment in two to three years.
Myer became master of its own destiny in 2006 when private capital players snapped up the Australia retail store icon for a mere $1.4 billion. Now, three years on, and the private equity owners are cashing out for a net $2.2 billion, according to news reports. On the usual equity investor rule of at least doubling their investment in 2-3 years it appears they haven’t quite hit the mark! And even though they have also had the benefit of the profits for the last three years, the capital invested in the business has exceeded profits.
The return the private equity owners will receive is not unreasonable in the current economic climate. It does represent a 20% compounded return on investment.
From a business turnaround point of view, the new owners have dramatically improved the business, and delivered very good return on unds employed, as well as delivered year on year profit improvements. In the economic circumstances over the last twelve months, the performance they have delivered is considered to be a good result.
So what are some of the positive features of the private equity rein at Myer, and what can small business learn?
1. They knew the exit strategy in advance: Whilst Myer management and owners always kept their options open, refloating the business on the stock exchange was always going to be an option to be considered. And no doubt the management team had other options available such as selling to a global retail business; continue in private ownership or even a management buyout. The key message is that they went into the business with a range of exit strategies in mind, so when the economy turned, they had options already prepared.
2. They had a business plan to deliver a turnaround: As well as exit strategies, they also put in place a 50 month turnaround program, which was not just about cutting costs. They repositioned Myer to target middle-income earners that wanted fashionable high quality products at affordable prices. They restructured lease agreements to reduce lease costs and focused on investing in infrastructure and systems that improved productivity and reduced working capital costs.
3. The exit strategy is about managing risk: The owners could have waited another year or two, deliver increased profits and hope the market would pay a higher price. But there was a risk to this option, that investors would remain cautious and not pay the higher price. By selling now, there is some potential that the share price will increase as a result of improved business performance. So given the stock issue was fully taken up, the private equity owners have locked in a 20% compounded return on their investment. In other words, they wanted to take the money now, in case retail doesn’t perform as well in coming years. A 20% compounded return on investment is better than nothing in the current climate.
4. They invested in people and systems: The private equity owners ensured that quality people were appointed to develop and run the business, and that they were supported by effective business systems, including an IT infrastructure that helped cut costs. The role of owner of the business has been separated from the management of the business by giving the management team autonomy over development of the business. This can directly contribute to the value of the business.
5. The delivered results: Nothing speaks louder to a buyer than delivered results. You can promise lots of opportunities to grow a business in the future, but a buyer wants to know the team can deliver, and they use historical performance as evidence that this can be done. Myer’s management team have delivered sustained increases in profits and return on funds employed in difficult economic times.
So what specific things can small business owners learn about Myer’s exit strategy and succession plan?
So how good is your succession plan? Does it outline how you will leave the business and how you will realise the wealth you have created? Is your business plan part of your succession plan? Do you feel comfortable that you have covered all the bases and protected the value of your business so it ends up in your pocket and not sold off as a “cheap buy”?
- Identify your exit options early: Myer has shown that an effective exit strategy took three years in the making, and this is no different for a small privately-held business. Start now and reap the rewards later.
- Document your succession plans: Getting your plans down on paper may seem less important, but it does ensure you do the right things at the right time. It’s all about proactively managing the wealth you have created in your business.
- Distinguish your business plan from your succession plan: The business plan focuses on the actions you need to take to grow the business. The succession plan focuses on the actions you need to take protect and realise the wealth your business plan has created.
- Continually examine the risks: Identify the potential risks to your business and what impact they would have on the value of your business. Always have secondary plans in place to deal with the risks should they occur. A good risk management assessment should be part of any succession plan.
- Invest in your people and business systems: Make sure your people, especially key management staff, stay with the business. Effective systems will help retain good staff and add value to your business.
- Deliver, deliver, deliver! A buyer will feel comfortable that your business will run without you if they can see results have been delivered in the past. It helps reduce the unknown factor in buying a business – will the business survive without the owner?
Contact Maxell Consulting now for a free discussion about your succession plan and what you can do to protect your wealth.