Business truths: 11 entrepreneurs reveal their exit insights
Entrepreneurs tell GB their tales of the unexpected and reveal what they wish they’d known before they climbed on the ‘conveyor belt’
If selling your business is the biggest financial decision you ever have to make, you want to get it right.
To help you do that we have enlisted the help of a fine collection of entrepreneurs who have exited (plus a couple of expert advisers), asking them to tell us something they wish they’d known about or put more effort into beforehand. So read on to discover the surprises that may lie in wait, or learn from common sense picked up by the people who have experienced it all first hand.
You need to plan your exit early
Who says: Lara Morgan, founder of Company Shortcuts. She sold toiletries business Pacific Direct in 2008 for £20m after 18 years Start thinking about it from at least two years out to maximise the value. Step back from the business and dispassionately consider who the likely buyers are, giving detailed consideration to the things they will see of value in your company. These are the assets you should focus on strengthening and securing to avoid value leaking away. Get a due diligence checklist from any leading accountancy firm so you understand the process when you sell. Get all the dull paperwork in order (you could even consider organising it all in a cloud data room), so you can focus all your energy on the deal, the buyers and the legalities. This will be time well worth investing. When you are selling, ensure your company continues to perform without you or your price will not hold up. It may go against every instinct you have as someone who has built your own business, but you need to step back at this point and ensure you have a great management team and succession planning in place. And if you expect to leave after the sale, bolt your best people to the floor.
The idea of it makes your business stronger
Who says: Mayank Patel, founder of Currencies Direct, which is part of the Azibo Group of businesses and has offices across five continents You should always have an exit strategy in mind, because it means that you continue to better your business all the time, irrespective of whether you sell or not. No one buys a house and lets it become run down. I had offers to sell in 1998, 2003 and 2006, but they’ve got to tick all the boxes. My success cannot be to the detriment of something else. You sometimes get very opportunistic deals and if you have a great business, people will find you. It’s important to be a business that people like, customers talk about fondly, and where the rate of referral is high. That in itself creates more attention.
The path to it can surprise you
Who says: Glenn Hyams, co-founder and director of BTC Activewear, which was acquired by German company Falk & Ross in 2010 I started my business in 1989 with two partners, including my uncle as a silent partner. We put in £15,000 each and owned a third of the company distributing Fruit of the Loom products in the UK and Ireland. In 1999, we’d grown to a £9m turnover by adding additional corporate, promotions and workwear brands, but I’d had enough and was disillusioned with the way the business was going. One of us had to buy the other out. My uncle came over from the US to mediate and he and I agreed to sell our combined shares for £20,000 to my partner, even though the business was valued at £500,000. My partner then changed his mind, partly because licensees I had a good relationship with accounted for 50% to 60% of our revenues. He knew they wouldn’t work with him. In the end, we paid him £200,000 and I asked the three licensees to stump up for my partner’s shares. In return I gave them a 25% stake each in the parent company, with my share split 50/50 with my uncle. In 2006, with turnover at £16.5m, one partner left to set up on his own and Charles Grose, Steve Pope and I decided to wrap the business up into one company with a central distribution centre. I also bought my uncle’s shares. In 2009, we moved to a modern 106,000 square foot distribution centre. Soon after we were approached to sell the business. BTC Activewear now has a turnover of £35m and this year 70% of the equity was acquired by the pan-European German distribution business Falk & Ross on behalf of its parent company Steadfast. I and my two partners retain 10% each. I’m 57 and the plan is for the parent company to be flipped in the next few years, but I may stay involved. I started in a little office and still pinch myself that I’m a joint director of a company of this size.
Remember they are buying out your plan
Who says: Ben White, co-founder of Notion Capital and a serial entrepreneur. With brother Jos, he founded RBR Networks, Star Internet, MessageLabs and Notion Capital. In 2008, MessageLabs was sold to Symantec for $700m The first time round with RBR Networks, when we were just a small team, we went into the meeting and I drew all the information on a flip chart. Although this approach eventually paid off, the exit process had such a steep learning curve that, as a result, it wasn’t ever clear to us whether we had sold for a good price or a bad one. Only with hindsight did we realise that with a detailed plan with key performance indicators and business drivers built in, we would have been able to value the business. Without one we could never truly value any company we had. So when we were making moves to exit from our next business, which was much bigger, employing hundreds of people across multiple offices, we knew that the flip-chart approach wouldn’t be sufficient and that a plan was crucial. So what do you include in your exit plan? We could have just put forward a set of monthly finances, but having outside investors really helped us to think long term and analyse the market size and growth against our own growth projections. Any short-term forecasts should be very cautious. Even then, the acquirers asked us to come back with more information. It did mean that they were very interested though. If we had gone in with just a set of monthly finances, we wouldn’t have been able to convince them in those initial meetings that our growth plan was realistic – and they would probably have walked away.
Vendors get the simple things wrong
Who says: Dan Martin, ex-business development director at Associated Northcliffe Digital and now managing director of Broadbean Technology, which he led the acquisition of in October 2008 One of the things businesses most often get wrong is getting their house in order before kicking off a deal. They don’t put enough thought in early enough. Ownership of the business’ shares, intellectual property and technology needs to be established. If this isn’t clean, it can really put the buyer off. For example, the technology may be built partly by employees and contractors with no contract saying whether they have any right to it. These things are so easy to get right. Pause for a moment when you’re growing, look back, and tidy up. It’s not the biggest item in due diligence, but it’s fundamental and should be easy to sort out. Buyers also look for a strong management team and are sometimes prepared to take a view on things if this is in place. In the due diligence process, we pay a lot of attention to the business’ reputation in the market, in particular with their customers – often it does come down to instinct. The wider team is also important, and the people below Broadbean’s founder Kelly Robinson and then managing director Dan McGuire were excellent. The culture was incredibly strong. It was clear there was a passion that spread throughout the team.
They take twice as long as you expect
Who says: Howard Weston is MD at Lucas & Weston, specialists in selling businesses worth between £250,000 and £10m The thing about exits is that they have a tendency to take a lot longer than you think. There is no one size fits all for the timing of a business sale. The clock starts when you make the decision to sell. Winging it isn’t an option. To be truly successful and do yourself justice, you’ll need to plan thoroughly, obtain tax advice and groom the business to look its best, a process that can sometimes take years. That said, if you’ve been approached and a buyer is keen to acquire, you will be amazed how heaven and hell can be moved to make something happen quickly. This usually involves throwing lots of money at lawyers and putting them in a room until a deal is done. It is also how major banks can be nationalised in a weekend. The quickest I’ve managed to sell a business for a client, from start to finish, is three weeks. However, this is certainly not the norm, and an average would be closer to six to seven months, although most professionals say you should allow up to a year. The sale process needs to be managed and driven at every stage, and not left to meander. Agree with the purchaser from the outset what timescales to aim for and constantly monitor them to make sure they are maintained. It is very easy for a deal to lose momentum. The longer things drag out, the more opportunity there is for the deal to fall apart or the buyer to have a change of heart. One thing for certain is that it will probably take more time than you expect, which can be frustrating for the entrepreneur who is used to being in control of their own destiny. A business sale has many stages, some of which can be very complex. It involves many parties, all with different and often conflicting agendas. Beware of last-minute wobbles as the end comes in sight. Almost every deal has one or two dramas, but a cool head and common sense usually prevails. With good advisers (and you need to invest the time to find the right ones), efficient housekeeping and tidy financial records you’ll find the process relatively straightforward. Legwork spent at the start will pay dividends towards the end.
They can drive a wedge between you and your staff
Who says: William Chase, founder of Chase Vodka. He sold Tyrrells Potato Chips for £40m to Langholm Private Equity in 2008 I had given Tyrrells everything, working 100-hour weeks. Being an entrepreneur can be really tough on family life, but I do believe if you want something to work you have to live and breathe it. I found selling the business incredibly tough and I know that many Tyrrells employees found it the same. Working for a small, family firm is totally different from being employed by a faceless conglomerate. There is a huge difference in culture between a family firm and a large company. People who work for small businesses take ownership of that company. People who work for large organisations work for themselves, for big bonuses or whatever. When I sold Tyrrells it was a huge culture shock for staff, but I fought very long and hard for the employees and secured what I believe were the best terms and conditions for them. A lot of staff felt that I’d deserted them and the company, and yet we’d only been going for six years. A business is like a child that you nurture and I believe that in the long term a business needs to grow. It needs different people for different stages of its life. As a business grows up, the employees will grow with it.
Earn-outs can go either way
Who says: Dan McGuire, ex-managing director of Broadbean, which was sold to £2bn media company DMGT in October 2008. He’s now pursuing other ventures I was in two minds about the deal initially. My business partner had a wife and two young boys to think about whereas I was 27, single and having the time of my life. I met nine or 10 entrepreneurs I trust and everyone said: “Don’t do an earn-out.” They said I was unlikely to get anything more than what I got on day one and that I’d hate it. However, I really enjoyed it. The only reason I’m leaving now is that I want to travel and look at new ventures. It’s a good time for someone else to step in to my position. You’ve got to look at the company you’re doing the deal with and be sure you’re comfortable. I could see that other entrepreneurs who’d sold to DMGT had stayed on beyond their earn-out and that was encouraging. One of them is now on this third incentive plan and that doesn’t happen in many other organisations. Ultimately I didn’t make quite as much as I’d hoped when we sold, but that was largely due to the recession. I still did nicely out of it. On reflection, I wouldn’t do another earn-out. I’ve had a great time, learned a lot and worked with some excellent people, but it’s something I’ve done and don’t have the urge to do again. Now I want to take some time to enjoy the success I’ve had and invest in other people who are prepared to take a risk and put the same amount of hard work in as I did.
They can leave you feeling empty
Who says: Hugh Chappell founded TrustedReviews and bit-tech.net, which he sold to IPC in October 2007 and Dennis Publishing in October 2008 respectively. He is now an active angel investor and non-executive director The one surprise after the event was the sadness. I felt very satisfied that I’d sold my companies and had achieved what I set out for, and more. But I didn’t expect the feeling of having lost something – and more than the business it was the customers. It was like being cut off from your wife and friends. For most entrepreneurs, work is their life. It was everything and I was left with a ‘now what?’ feeling. I had no interests or hobbies and didn’t want to spend all day annoying my wife. I don’t play golf. I had a fancy car and it’s sitting in the garage. Out of respect for my acquirers, I didn’t want to launch another company in the technology and publishing space. And while I thought about starting a business, I decided I needed to re-invent myself and focused on the possibility of angel investing, advising and mentoring. I’m still learning angel investing. It’s like Blackjack – you play with what you can afford to lose. I decided to take my time and look at lots of businesses. I’ve made two investments so far – in mobile dating site Lovestruck.com and Net Communities, of which I’m chairman. I’m close to making a third and plan to have four or five that I can be active with. I attend and mentor at start-up events, such as Launch48, Seedcamp and Entrepreneur Country, and love seeing what the next generation are coming up with. I’m also on the board of Time Out. I’m 52 and have never been happier – I genuinely love what I’m doing.
New opportunities open for you
Who says: Mark Mason, chief executive of Mubaloo. He exited his agency Mason Zimbler Digital Marketing in December 2008 I left Mason Zimbler Digital Marketing after running it for 11 years. I had a great time, but I felt that I had moved so far away from the coalface that I needed a new challenge. That along with the nice bank balance. So Mark Mason, CEO was no longer. I was now just Mark Mason, unemployed. I did intend to take a year out to do all of those things that I’d promised myself. The trans-Siberian railway was one of them. Getting fit was another. I must say I did initially thoroughly enjoy not working. I had the time to meet all of those people I hadn’t met for a while for coffee and was able to catch up with all the filing and tidying I’d never had much time to do. But something was missing. I’m not even sure what it was – status, title, role, worth? But it was an emasculating feeling not to have a goal having spent all of my life, up to that point, trying to get somewhere, grow something, and achieve ‘success’. When I sold Mason Zimbler I was 42 years old, so far too young to retire, but I can now imagine how disorientating retirement must be for many people. At the end of the day, we need purpose, whether that’s in work or hobbies. I ended up launching Mubaloo, a smartphone application development company, after three months. I also became involved with The Prince’s Trust charity. I have now found a new enthusiasm for my work, I’m learning new things again and I’m loving it. We’ve grown the business from two of us to 40 employees in 18 months, so you could say I’m back at the coalface. But the rest was great.
No two exits are the same
Who says: Ed Bartlett, co-founder of in-game advertising company IGA Worldwide, which he exited in November 2010 to start The Future Tense, a business showcasing emerging artists The common denominator is that the legal agreements governing terms and conditions are always of utmost importance. One exit type that is rarely covered is when a founder chooses to leave the company they set up, as I recently did. Founders are often involuntarily exited from their company for a wide variety of reasons, and rarely on particularly good terms. However, even when a founder chooses to leave their business of their own accord in wholly amicable circumstances, it’s still good practice to have a formal compromise agreement drafted between the two parties (see below). Ultimately, even if you’re used to overseeing contracts, as a founder it’s likely you will have a whole host of complex founder, service and stock agreements. As such, with any kind of exit event you would ultimately be well advised to have the support of a legal professional well versed in such matters.
The process is more important than the price
Who says: Andy Pedrette, director, Smith & Williamson Corporate Finance Ultimately the highest price that you are offered for your business will be decided by the market. If you prepare for sale correctly and approach the right potential buyers in the right way, you will get the right price. If you don’t like that price, don’t sell.
- Don’t get obsessed by price too early. Beware your own valuation, as most entrepreneurs overvalue their businesses because of the emotional capital invested over years of hard work.
- Beware of the flattering ‘valuation’ from advisers pitching for the sale work. The adviser who points out potential problems and is already thinking of ways around them may be better.
- Appoint an adviser you trust to deliver the best process to identify buyers, to market your business and to manage the sale process to completion.
- Don’t be fooled by really positive initial meetings with potential buyers. At that stage, their principal aim will simply be to get more information. They are selling themselves to you, so almost all initial meetings are very friendly affairs.
- Beware of indicative offers. They are meaningless if not deliverable. Examine the assumptions and conditions very carefully. Don’t offer exclusivity unless you are confident the offer will have no reasonable cause to reduce price.
- Be wary of unfunded offers. However much a bidder wants to pay, it is meaningless if they do not have the means to finance it.
- Be sceptical of offers that increase for no reason to stay in a sale process. Such leaps are not normally genuine.
Whatever price you eventually sell for (or if you choose not to sell), you need to be able to sleep well afterwards, happy that you could not have done more. That’s why the process in getting to an exit is more important than price.
Compromise Agreements: The lowdown
Ed Bartlett outlines some of the key elements to consider within a compromise agreement: 1. Compensation payments: There are numerous circumstances where some kind of compensation payment may be due, and it’s important that both the terms and payment triggers are defined. Note that, in the UK under section 403 of the Income Tax Act, the first £30,000 of any compensation payment is typically tax-free. 2. Stock: As a founder, it’s very likely that you will own shares and stock options in the company, and it’s vital to clarify the status of both within the compromise agreement, particularly if you are still in a vesting period. Check your original agreements carefully, as there is likely to be specific language around exit events. 3. Anti-disparagement/announcement: Announcing the departure of a founder member is always tricky, as they will typically have a high profile with press, partners and clients. If you say nothing, it looks like you are trying to hide bad news, and people will fill in the blanks themselves. It’s much better to agree a proactive mutual press announcement, and ideally include the wording as an appendix to the compromise agreement. 4. Non-compete: Standard non-compete clauses can be extremely difficult to enforce in practice. However, lawyers are finding new ways of drafting much more effective language. You may find that the company will want to clarify or extend terms of non-compete in a compromise agreement, which can potentially be offset by further compensation payments. 5. Reference: It’s a very good idea to mutually agree official wording for a reference and include it as another appendix to the compromise agreement. Circumstances can change quickly, and it makes sense to cover these matters while you can even if you never need to use them.