What’s your tipping point? – Richard Rasmussen

Ascent Partners uncovers that only 15% of printing proprietors have an exit strategy. Most would have a rough plan based around the proceeds of the sale of their business, perhaps leasing out their owned business premises, their total equity in private property / investments and superannuation.

Perhaps the major part of that sum, and the hardest for them to put a value on, is the proceeds of the sale of the business and the net equity that provides.

So the default position for many is to say that this figure needs to be $X before I can afford to get out and live the life I want to lead. The problem with this is “need to get” rarely equals the actual net proceeds they obtain for the sale.

So at some stage there will be a tipping point, when proprietors realise that this “need to get” figure is out is out of reach / unrealistic and they need to readjust their plans. These are the most common “tipping points” that push proprietors into action are:

• Creditors wanting to get paid. A more prevalent creditor we are now seeing far more active is the ATO.
• A key staff member / shareholder leaving
• Losing a major customer
• An illness of the proprietor / key staff / shareholder
• Unwillingness of the owner / spouse / shareholders to tip in more money
• The property lease coming up for renewal
• The business not making an adequate return
• Resignation by the proprietor to the fact they have run out of puff.

The probability of all of the above can be forecast. It’s really an assessment of the risk of one or more of these things happening in a certain timeframe. But few actually see the high probabilities and then take early corrective action. And for those that do take that action it’s often only a short term fix, it doesn’t actually build a more sustainable business. The hard call is never made, and when the “tipping point” occurs substantial equity has been eroded.

Read our monthly bulletin Market Watch to see the massive changes that have impacted most of our markets in the last half of 2011, which have continued on into 2012. It begs the question, “What was the tipping point of these sales, closures and consolidations?” Chances are it will be on the above list.

Many businesses decisions have been forced on the business, leaving a highly unsatisfactory result for the proprietor, staff and creditors. It strikes me that much of this carnage could have been avoided had the tipping point been forecast or considered or known.


How to forecast the tipping point?
Step one is an early, objective assessment of where the business is at. The importance of objectivity can’t be overstated. Sometimes it is very hard to be objective about a business you own, that has been around a long time, and perhaps passed down from generation to generation.

The importance of early assessment is also just as important. Putting up the white flag too late can result in a dramatic loss of equity. Rasmussen's experience has shown that most failed businesses could have walked away with more equity for themselves, their staff and their creditors, had an earlier assessment been made and from that a correct course of action been taken. They didn’t foresee the tipping point.

Key to the assessment of the business is a call on whether the current business, in the current format is sustainable. What’s the probability of one of the above “tipping points” occurring? Key to that is the answer to the question, “Is it capable of making an adequate return on investment / return to owner?” And perhaps more to the point is, “can it realistically be turned around to make an adequate return?”

Unfortunately many Australian print businesses that I see are NOT sustainable in their present format. They don’t make enough money for the owner, they are trending downwards (sales, margins and profits), and the equity the owner has in the business is reducing daily.

Some smarter operators see the writing on the wall. They know they have to change and perhaps reinvest and they decide early not to do that. They would rather say, “let’s sell it now, when I can maximise my equity return, rather than in two to three years, when the value of the business is less, and my equity is less.

So they either need to change or get out. Stagnation is not an option. And most of these businesses have something of value now. They have their client relationships and sales. That is of huge value to others.

For many selling the business is not the only alternative course of action. If they really have to get $X return for their business, they need to come to the realisation that it ain’t going to happen without a major change to the way they do business. Many need to understand that it’s not all about them doing all or any of the manufacture - there is certainly a vast away of versions of how that can occur. For example I’ve seen some very good outcomes from downsizing and partial outsourcing, and from proprietors and key staff moving to another business.

Taking a quick look over the abovementioned tipping points and apportioning a probability of occurrence to each, will hopefully shed some light on the risk elements, and hence provide a starting point in the process of planning their future.

Rasmussen feels that it’s all about building sustainable business models, and if one can’t be realistically developed, then it’s time to bite the bullet and change the way you are doing things. And that may well be to exit now.