by Michael O'Connell, CEO, SIBCO Australia
Where do I get the capital to grow my business and how do I maximise my exit?
There are approximately 1.4 million registered businesses in Australia and at some point in time the owners of most of these have asked that question.
Every business requires some external funding along the way be it debt or equity. The fact is that most (and I mean about 90%) of Australia’s small and medium-sized companies have historically relied on traditional debt funding from the bank (the dreaded overdraft) to provide working capital. This generally means giving over the family jewels as collateral. That’s OK while you’re young or if you are happy just to plug along with average yearly growth, but what about if you have the opportunity for rapid expansion through, say, acquisition or new market opportunities? What happens when you want to sell up and go play golf? Well the statistics are not pretty.
Less than 5% of Australian companies currently export product, manufacturing businesses are being run out of town at an alarming rate because they (supposedly) cannot compete with cheap imports and the number of SME’s who successfully make a trade sale are running at about 25%. (No wonder some of the golf clubs are looking for new members).
What about “Equity Mate”? Great idea however, one of the prime reasons traditional debt funding is so prevalent is that few people want to put equity capital in to a private company.
Enter the NSX (Australia’s fully regulated alternative stock exchange) and an old model with a new twist. Requiring a minimum of only 50 shareholders and $500k market capital at list, the NSX provides a platform that best positions a smaller company to attract new equity capital and ultimately best positions the major shareholders for an exit that will provide years of golf club fees.
This is a strategy that reduces reliance on traditional debt funding while at the same time enabling the original shareholders to maintain real control of the company. It is a model that better enables growth via acquisition to be added to organic market growth. It is a platform that encourages orderly succession planning and can provide real and effective incentive for management and key staff.
The sad fact is that an exit through a trade sale will not generally yield more than say twice average earnings of the past 2-3 years whereas the share value of a listed company generally runs at between 5-10 times earnings (even if you retain only 50% shareholding; do the math). A listed company is better positioned (accepted) to deal with other public companies and corporations.
Not all companies can or should adopt this strategy. However, for those who want to grow a business (as distinct from produce more product) and create real value then this is a model worthy of investigation. Of course in doing so one has to provide investors with a reasonable dividend (replaces interest on debt funding) as well as create a capital gain on shares that are offered to the market.
Author, Michael O’Connell has assisted numerous SME’s restructure and grow – increasing their value – and along the way has assisted some with negotiating successful exits. With a strong belief that managing the increased value of the business is as important as improving revenue and profit Michael has become an advocate for the model available via NSX listing. As CEO of SIBCO Michael has already project managed two listings on this exchange.
