All articles in Volume 12 Issue 4

Getting your business “sale ready”

A lack of preparation in today’s heavily weighted buyer’s market can dramatically extend the time required to find a willing buyer for your business or even render the business unsaleable, warns Simon Merchant, founder of The Merchant Report.

He says too many potential sellers are holding out as long as they can for the economy and business sale prices to improve. At the same time, buyers, their advisers and bankers are not prepared to accept the risks associated with the current asking prices of those businesses that are being offered for sale.

There are many reasons that motivate small and medium-sized enterprise (SME) owners to exit their businesses, but Merchant believes that it will be prolonged negative cash-flow that increasingly puts owners under duress in 2014 and persuades them to put their businesses on the market.

He says the first step in getting your business “sale ready” is to use the various tools that can help you understand the current market value of your business and its strengths and weaknesses through the eyes of a buyer. This kind of analysis will help you to identify the perfect buyer profile – that is, the buyer most likely to offer the highest sale price and attractive terms and conditions of sale.

“Be objective and conservative when deciding if your business is ready for sale,” says Merchant. “Many strengths of a business can be enhanced, and weaknesses mitigated, by creating a very simple strengths, weaknesses, opportunities and threats (SWOT) analysis and action plan for implementation during the time you can afford yourself prior to market – many at little expense.”

Broadly, the things potential buyers will examine include:

  • How long has the business been established and how long have you owned it?
  • How has your income and gross profit margin been trending during this time?
  • How much does the business rely on you and how reliable are your systems and procedures?

Collaborating with a trusted business adviser will also help. “He or she will be able to drill down on many of these issues and provide you with perspective and local market intelligence. Ideally, a strategy can be developed hand-in-hand to stimulate buyer competition, come the time to launch your marketing campaign.”

Merchant says one of the most often overlooked items when preparing for sale is security of tenure, particularly if you are leasing your premises. “Be sure to check when your current term expires and what arrangements are in place for options to be exercised. You are selling a going concern and buyers will look to avoid as much risk to their future earnings as possible.”

He adds: “Two buyer segments that are growing across Australia today are the baby boomers and redundancy beneficiaries. If a business can offer lifestyle and security, then we should see buyer competition rise again in 2014.”

Redundancy beneficiaries are cashed up and prepared to buy themselves a job in a business that offers a sense of security. And, baby boomers, perhaps feeling they are overlooked in the job market, may be happy to direct their savings into a business that provides a significantly higher yield than more traditional passive investment vehicles.

“Baby boomers can often bring valuable management experience to SMEs. With the assistance of younger managers to handle the day-to-day operations, SME ownership does not have to affect their lifestyles unnecessarily.”

Meanwhile, Craig West, CEO of Succession Plus, says Australia’s free trade agreements (FTAs) with other countries also offer opportunities to sell your business.

“With supply exceeding demand in Australia for SME businesses, it makes sense for business owners to consider the dual benefits of exporting their goods and services overseas under FTA arrangements and promoting their businesses for sale or investment internationally,” he says.

“Australian businesses have a well-deserved reputation for excellence, innovation, consistency and reliability which, together with our high quality of life and multi-cultural population, underpins the attractiveness of Australian enterprises as a target for outbound investment or acquisition.”

West adds that many wealthy overseas entrepreneurs and high net-worth individuals are becoming increasingly interested in migrating to Australia to satisfy a number of long-term retirement, succession and quality of life objectives for themselves and their families. At the same time, the Australian government is encouraging high net-worth individuals to apply for permanent residence under the Significant Investor Visa (SIV) program which is designed to attract investment into government bonds, managed funds and private companies.

Is your CEO a narcissist and does it matter?

A recent study found that companies led by less narcissistic CEOs significantly outperformed those led by their more narcissistic counterparts. But is having a narcissistic CEO necessarily a bad omen?

The study, conducted by the Macquarie Graduate School of Management (MGSM), analysed the returns of companies in the S&P/ASX 100 over an 18 month period (September 2011 – March 2013). It found that the least narcissistic CEOs experienced the highest returns. In fact, the 10 least narcissistic CEOs more than doubled the performance of the most narcissistic CEOs.

According to the research team’s leader Professor Alex Frino, narcissistic CEOs crave authority and sometimes have a sense of superiority. They tend to have a sense of entitlement and to be exhibitionists.

The research demonstrated that narcissistic traits tend to manifest themselves in the speech of people. Narcissists use words like “I”, “me”, “my”, “mine” far more often than “we”, “us” and “our” when talking about their position in the company.

“They love talking to the media and the research found that photos of them often dominate the annual report,” says Frino, MGSM’s Dean. “They respond very well to positive reinforcement. They crave it and they obviously love the limelight.”

But he notes that as CEOs of ASX 100 companies, they would be very clever individuals and many would have tuned into their personality traits and shortcomings and tried to compensate for them.

“So having these traits does not necessarily mean they are going to be bad leaders. It just means they have certain personality traits that could cloud or affect the way they operate,” says Frino.

“Narcissist leaders can inspire others and are very effective in situations where you need change and creativity.

“If you take two steps back, it’s really all about hiring the right person for the right situation. So fundamentally, that’s my best tip for the board.”

Frino points to a paper in the Harvard Business Review in 2000 in which Michael Maccoby argues that the type of leader you need depends on the situation and implies that narcissists are ideal leaders in buoyant markets with many opportunities because they are risk takers, inspire others and go for big projects.

“However, if you have a situation where the company is operating in very tough trading conditions and you need cost cutting and control, a narcissist will be a weaker point. In that type of scenario, you may be better off appointing what Sigmund Freud would have called an ‘obsessive’ – someone who is really focused on the detail,” says Frino.

He notes that the period in which his research was conducted was characterised by fairly tough trading conditions. “If we looked at a period where the market was more buoyant, we might see different results. But that research still needs to be done.

“What really counts is self-awareness. If you have a narcissist who is self-aware and can deal with his or her deficiencies, that person is going to be a much stronger leader than an obsessive who is not aware. So when interviewing people, boards should not only look at whether the individual is a narcissist, but also whether he or she is self-aware and able to overcome personality shortcomings.”

Fine-tuning your response to shareholder activists

A new report warns that too many boards are complacent about shareholder activism or fail to see its risks. And those using traditional defence tactics to tackle activists are likely to find themselves outflanked.

The report, Shareholder Activism in 2014: Are You Prepared?, was prepared by GPS, which specialises in defending activist campaigns.

In it, GPS says most activist or dissident action in Australia has historically been confined to smaller listed companies, but activists have shifted gear since early 2012. Examples of this include Crown’s campaign against Echo Entertainment’s chairman; Mark Carnegie and consortium’s tilts at Qantas, Fairfax Media and Brickworks/WH Soul Pattinson; Ian Dunlop’s tilt for a BHP Billiton board seat; and institutional agitation at Newcrest, Leighton and David Jones.

GPS reports a surge in activist activity last year, with a leap in board spill campaigns – between one to three each week – and 78 “strikes” and 16 near misses against Australian Securities Exchange (ASX) company remuneration reports.

It also points to heightened activity from activist investors and private equity firms, the re-emergence of corporate raiders like Sir Ron Brierley and Dr Gary Weiss and the recent creation of dedicated “activist” funds, such Alex Waislitz’ Thorney Opportunities, Gabriel Radzyminski’s Sandon Capital and Mark Carnegie’s Companion Fund. And, in January 2014, a record eight board spills were announced.

GPS says the issues that attract activists are varied. “They can include poor performance, misaligned strategy, governance and remuneration issues, nil-premium control opportunities, inefficient capital management, board indifference and mismanagement, disaffected co-investors and related party conflicts. Activists in 2014 are looking very closely at all these openings and any others that opportunistically emerge.”

So who are the activists? “Sometimes they are corporate investors, hedge funds or private equity. Other times they are smart individuals or boutique funds willing to risk a fight. Increasingly, they are specialist investors whose purpose in life is to extract value from any perceived opportunity,” says GPS.

“But also they are large institutions driven by changing local and global governance mandates or significant on-register investors.”

To deal with the risks, GPS advises taking these steps:

  • Examine your board.
  • Know your shareholder base.
  • Assess your corporate governance.
  • Perform financial and peer reviews.
  • Develop a communications plan.
  • Develop a shareholder and media engagement strategy.
  • Assemble your communications team.
  • Develop an activist response manual.

When assessing your board and corporate governance, GPS says you should examine the following:

  • Are your internal rules and charters up to date?
  • Do you have a plan for board tenure, nominations and succession? Are any board members “over-boarding”?
  • Do you have a director skills matrix?
  • Is your D&O insurance cover adequate?
  • Is your remuneration structure best practice and peer tested? Are all interests properly aligned?
  • Has the company’s strategic plan been effectively communicated?
  • Are appropriate risk management procedures and controls in place?

GPS notes that investors who are frequently engaged and have bought into the company’s strategic vision are less likely to support activists.

According to GPS, the board should play a greater role in the shareholder engagement process. To do this, companies should identify who from the board should speak and under what circumstances. The board should be fully briefed and directors should know who the shareholders are and their relative importance in the context of engagement and the nature of issues and concerns.

However GPS notes that one size doesn’t fit all and each company needs to determine what its board’s role will be in the event an activist appears.

Are you ready for new privacy rules?

Directors need to ensure their organisations are prepared for sweeping new privacy rules that take effect next week to avoid copping tough new penalties from a regulator with wider powers.

On 12 March, the Australian Privacy Principles (APPs) come into force, replacing the existing Information Privacy Principles and National Privacy Principles. The 13 APPs significantly raise the bar on how businesses and federal government agencies collect, store and handle individuals’ personal information. Organisations will also need to comply with increased legal obligations regarding overseas disclosure of personal information and direct marketing.

The new rules also beef up the privacy regulator’s enforcement powers with the Office of the Australian Information Commissioner now able to levy penalties of up to $1.7 million and impose enforceable undertakings on non-compliant organisations.

But according to Alison Baker, a partner at Hall & Wilcox Lawyers, and Aaron Greenman, director of IT security and privacy at consulting firm Protiviti, many companies are still unprepared for the changes.

Greenman notes: “Organisations will be saddled with a raft of new responsibilities including ensuring they have processes to deal with privacy complaints, making sure they are accountable for personal information disclosed to overseas parties, establishing security measures to prevent information breaches, and many more.

“These wide-ranging changes will have a big impact on organisations that collect a lot of personal information such as online businesses, retailers, utilities, healthcare providers, communications companies and most businesses in the finance and insurance sectors. Yet, while government departments are generally well-prepared, regrettably, our experience has shown that the majority of corporates are not.”

Baker says: “Failure to comply with the new Privacy Act principles puts business at serious reputational, legal and financial risk. It’s a big change from the previous regime, which was much softer on privacy breaches.”

She says every business needs a privacy policy to satisfy compliance with the new principles; those with an existing policy will need it amended.

To avoid potential problem areas, she advises directors to ensure third-party supplier contracts address the new principles and place contractual obligations for privacy compliance on third-party suppliers.

“Businesses engaging with overseas suppliers need to ensure they have good contracts in place. If they already have a relationship agreement, they should look to enter into data transfer deeds with their overseas suppliers,” she says.

“All processes around collecting and storing personal information, as well as access, correction and complaint handling processes, need to be reviewed. This includes destroying or de-identifying personal information when it is no longer needed.”

Greenman warns that companies which have not already done so, need to take immediate steps to become APP-compliant.

He says the steps your organisation should take to become APP-ready include:

  • Identifying the classes of personal information collected and held. Examples include contact details, employment history, educational qualifications, racial or ethnic origin, tax file numbers and health information.
  • Identifying how such information is collected, held, used and disclosed, and the purposes for which it is collected and used.
  • Identifying the scope of any cross-border disclosures, including where possible, the countries where recipients are likely to be located.
  • Reviewing and updating procedures and policies for managing the privacy risks at each stage of the lifecycle of this information, including at the time of collection, use, disclosure, storage and destruction.
  • Implementing security systems for protecting the information from misuse, interference, loss and unauthorised disclosure, such as IT systems, internal access controls and audit trails.
  • Implementing procedures for identifying and reporting privacy breaches and for receiving and addressing complaints.
  • Implementing access and correction procedures.
  • Introducing procedures to give individuals the option of not identifying themselves or of using pseudonyms.
  • Establishing a process to conduct a privacy impact assessment for any new projects where personal information will be handled.
  • Establishing governance mechanisms to ensure ongoing compliance with the APPs, such as appointing designated privacy officers and regular reporting to the board and management.

“With the rise of online technologies and social media, community concerns about how organisations use or misuse private information are at an all-time high,” says Greenman. “Today, privacy is an issue that if done well, builds deep bonds of community trust and customer loyalty. But on the flipside, when things go horribly wrong, such as when a major security breach occurs, the public backlash and negative publicity can inflict long-lasting damage to corporate reputations and see customers deserting a company for a very long time.”

Company directors’ new Q&A video with former Australian Privacy Commissioner Malcolm Crompton will help directors better understand the amendments to the Privacy Act that come into force on 12 March.

The video is a companion to its new book, also written by Malcolm Crompton, Privacy Governance: A Guide to Privacy Risk and Opportunity for Directors and Officers.

ACNC moves to cut reporting burden for charities

Charities will not have to duplicate financial reporting to the Australian Charities and Not-for-profits Commission (ACNC) and to the states and territories in the 2014 reporting period.

Instead, when completing their 2014 annual information statement, they will be able to electronically submit to the ACNC the same financial reports they provide to the states and territories.

ACNC Commissioner Susan Pascoe says the change means that medium and large charities will not have to spend extra time and money filing annual financial reports to the ACNC.

“This announcement is just one of many red tape reduction initiatives we are undertaking,” she says.

Meanwhile, the ACNC has also released report which lists recommendations made at the Red Tape Reduction Forum, held in Canberra in December 2013.

The recommendations include:

  • Harmonising regulation and reporting across the not-for-profit sector.
  • Government regulators adopting a “light touch” approach, with compliance interventions a last resort.
  • Measuring the red tape burden.
  • Reducing red tape for volunteers.
  • Organisations providing only one set of audited accounts to different government agencies.

The full list of recommendations can be viewed in a report: Measuring and Reducing Red Tape in the Not-For-Profit Sector.

Building on the discussions and recommendations of the Red Tape Reduction forum, the ACNC has now commissioned Ernst and Young to conduct research on the regulatory and reporting burden on charities in Australia.

Telstra Cloud ad

Boardroom Report disclaimer:

The opinions in Boardroom Report do not necessarily represent the views of the publisher nor the publication. Every effort has been made to ensure accuracy, but no responsibility is accepted for errors. All rights reserved.