Boom offers exit for those ready to shift gear

27/02/2008 - 22:00

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Private business has had an extraordinary year, with a rush of trade sales and floats allowing a window in to owner's thinking.

Boom offers exit for those ready to shift gear

Selling out or selling down; it’s been an easy choice for many business owners lately, especially those who have the runs on the board, are prepared to sell and, perhaps, have lost the enthusiasm for facing daily challenges.

The boom economy has raised just as many obstacles as it has opportunities for those in private business, prompting many over the past year to realise its time to get out and take advantage of a monumental seller’s market.

The scale of private business sales, and the prices obtained, has been unprecedented as owners have sold down or out to an influx of foreign and national players, as well as to their local rivals.

Before the sub-prime problems in the US, cheap capital meant listed players competed with private equity to bid-up prices.

But strong prices were not the only reasons economic good times have prompted business sales.

Staff shortages (cited by businesses contacted by WA Business News as the number one current issue for them), the need for capital to keep pace with market growth, and new business opportunities are all touted as reasons for owners to exit or sell controlling stakes in their business.

There is also age.

Mergers & Acquisitions managing director Ross Goldstein said increasing numbers of baby boomers were reaching a stage in life where they must remain with their business for a few years after selling to ensure the best possible price.

“A lot of people are getting to the stage that they are mid-50s and, to maximise the value of the business, they have to stay for anywhere between two to five years,” Mr Goldstein said.

“If they want to retire when they are 60, as common sense dictates, they need to start selling now.”

Mr Goldstein wondered what the new federal government might bring in terms of capital gains tax or superannuation, which could prompt more business people to consider selling their assets.

He also said the market had softened due to sub-prime led financial issues, though buyers remained for quality assets.

BDO Kendalls director Lyall Bear said the climate had been perfect for business sales, with tax and superannuation changes in recent years adding to the incentives for owners to act.

“They have been good times,” Mr Bear said.

The activity that has taken place this year includes a variety of arrangements, from straight cash transactions to scrip deals with long work-out clauses and performance criteria – depending on the sector, the buyer and the seller.

Most activity has been in the engineering industry, and related areas in mining and property services such as earthmoving. With business booming across this broad spectrum, a number of long-term family owned businesses have taken the opportunity to sell.

“The baby boomers are definitely taking advantage of the economic boom to exit their businesses,” RSM Bird Cameron partner Rami Brass said.

Mr Brass said there were several options, including genuine succession to family or management.

But he said it was not all good news for those reaching the end of their business life. There were those whose businesses were not in favoured industries, were too small or who had too much of the goodwill locked up in their owner’s presence to command a strong price.

“They are just closing down their businesses,” Mr Brass said.

The myriad reasons for sales have played out in the many announcements and interviews over the past year.

Overwhelmingly, business owners make the point that they needed the capital and, sometimes, the backing of a bigger company to continue to grow and service their clients.

Recently bought by UK company Inspicio Group for $26.5 million, Kalassay had been expanding for five years, including a $5 million investment in robotics for its Kalgoorlie lab.

Further expansion proved too difficult for the privately owned company and an offer of a generous capital injection and management support from a bigger parent was too good to refuse.

Kalassay was the latest independent minerals analysis sale, following in the footsteps of Ultra Trace, which was bought by Victorian-based Amdel for a reported sum of $80 million, and Genalysis, bought by English company Intertek Group plc for $56 million.

Kwinana-based mining and industrial processing services player TCC Group sold to the UK’s Cape plc after the company had outgrown its private ownership, according to founder Terry Iannello.
“We need to grow over east and get bigger and have the capacity to take on bigger projects,” Mr Iannello told WA Business News at the time of the deal.

There was also the opportunity to take some money out after years of hard work, though most of the management would remain with the company.
“You have to get some reward for it; you work pretty hard,” Mr Iannello said.

At Positron, a 21-year-old WA business that has spread across the Nullarbor to regional NSW, principal and founder Jeff Hogan has remained with company, heading up a new electrical services business unit within acquirer RCR Tomlinson.

Earlier last year, the MacCormick family decided to divest what was once its core civil engineering business, DJ & MB MacCormick, to concentrate on property development; a familiar theme among sellers.
Like some of their peers, the MacCormicks said there were limitations in a family business, especially on the management side of the equation.
Engineering was also prominent in some of the floats of private companies in the past year.

Brierty Ltd is one example, founded in 1981 by the Brierty family, including current managing director Alan.

The biggest float of a private company in WA was earthmoving player NRW Ltd, jointly established by Jeff McGlinn and John Silverthorne in 1994, with $262 million going to vendor shareholders.

Redcliffe-based Global Construction Services said at the time of its ASX listing that the move would provide ongoing access to the capital markets to fund future growth opportunities and provide increased financial flexibility.

But not everyone has spent the year looking at how to capitalise on the equity side.

Business broker Goodman Mitchell O’Hehir director Graham O’Hehir said he found many baby boomers were hanging on longer than he expected, hoping to make the most of the better times.

Mr O’Hehir said that, while the top end of the mergers and acquisitions space had been busy, the lower end had been weak.

He said he believed the strong market for labour had contributed significantly to this, with business hanging on to staff at all costs, rather the usual redundancy packages that fuel the market at the lower end.

“People who normally buy an income are still employed,” Mr O’Hehir said.

“They are the modest end of the market but they do create demand.”

For many in the private sector, the staff issue reverberates as the biggest obstacle to their ability to enjoy the fruits of the boom and take advantage of growth opportunities.

A common refrain from business people contacted by WA Business News was the problem of finding skilled staff and, increasingly, labour in general.

The issue has festered in WA for the past four or five years, initially in highly skilled areas such as engineering but, as unemployment has bottomed out, flowing down in the past year to unskilled areas such as retail shop assistants.

Many in business believed more could be done to improve the speed and efficiency of 457 visas to plug this gap.

David Lock, head of Fremantle-based agribusiness and seafood player Craig Mostyn Group, was highly critical of the bureaucracy across the board, but felt that immigration was a critical issue.

Mr Lock said the shortage of labour was constraining business growth and the state was too slow in general to respond to businesses seeking growth.

“The state government needs to work with federal government to ensure that employers can bring in workers on 457 visas,” he said.

“WA’s needs are different to other states and we need to ensure we can bring in appropriate skill levels and not be constrained by employment levels in eastern states.

“Bureaucracies need to have better systems for managing developments,” he said of the general business climate. “Currently there is lack of clarity in policies and lack of access to decision makers.”

But not everyone saw staff issues as simply all about a shortage of people.

Stories abound of the problems caused by cashed-up workers who have too much money and little motivation to make the most of the present conditions, because they had never experienced a bust.

Fencemaker principal Kevin Gray said the current environment had pushed up wages and made finding new staff difficult at times.

However, Mr Gray said there was an element of luck, citing a recent departure that had worried him, until a better candidate filled the vacancy.

He said he worked hard to create a team atmosphere, which meant his workers got more from their work than just nine-to-five labour.

“It is not always wages that motivates people,” Mr Gray said.

The business owner was also concerned that hiring the wrong person just to fill a gap could have more negative consequences than leaving a position vacant.

“If we have a destructive personality in here we get rid of them,” he said.

Private business people increasingly admit they are offering a virtual counselling service to their workers. With staff at a premium, some workers are letting their private lives overtake their employment as a priority. In another era they would be unemployed, but these days owners have to interfere to keep their staff on board. It’s an area fraught with difficulty.

The Brand Agency’s Steve Harris said his biggest business issue was securing quality staff, with the boom-created shortages combining with the fickle loyalties of the younger generation to make it hard to get top strata staff.

Mr Harris said 65 per cent of his staff were under 30, in Generation Y, which had a different attitude to work.

“In my business I’ve got no alternative but to pay significantly more than market rates to get the best people, because if I don’t have the best I will lose business,” Mr Harris said.

“There is little point in worrying about the longer-term issues, say five to 10 years out.

“At present, I’m focusing on getting through the next 24 months.”

Like a lot of businesses, CAPS Australia (see story page 15) has seen a lot of people come and go during the recent period. Its also had mixed results from attempts to retain staff by paying them more, or attracting new employees through 457 visas.

“You can only learn by experience,” CAPS executive chairman Bob McIntyre said.

Mr McIntyre said the company had moved to invest heavily in better equipping its current workforce.

“We are trying to focus on having fewer people do more, we are trying to get growth out of efficiencies,” he said.

For instance, CAPS is proud of its centralised call system, which routes inquiries to the appropriately skilled people wherever they are in the country, rather than the previous system which often left callers at a dead end in the company’s national branch system.

Mr McIntyre said that investment had had a marked impact on sales, without the addition of new staff.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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