Entrepreneurs on what selling your business is REALLY like
Entrepreneurs share experiences of selling to ensure you don’t get any nasty surprises if you do
Barbara Cassani went very public over the sale of Go, the low-cost airline she’d built.
She didn’t want to sell, but in practice you don’t always have the luxury of choosing the time. Her VC, 3i, despite having agreed otherwise, felt it could not turn down the opportunity to exit and replenish its own funds.
Linda Bennett of fashion house LK Bennett on the other hand did choose the moment and very publicly put her business up for sale, seeking around £75m. However, a satisfactory deal failed to materialise, despite considerable interest, meaning she has been forced to continue in a business she was ready to leave behind.
Either way it’s hard to be totally clinical about it. For most of you, there’s a lot of emotion tied up in your ventures. Equally difficult is keeping a lid on your plans to sell when you know going public could harm performance, give competitors some ammunition or concern customers about the company’s future. Managing director of product innovation company PDD Group Helen Gray, who has sold numerous businesses – either her own or as a non-executive director – agrees that keeping things under wraps is tough and even the simplest of things becomes an exercise in subterfuge. “My husband was selling his business,” she remembers, illustrating the point, “and after staff had left for home spent a lot of late nights photocopying documents. He came home one night saying ‘why are those bastards all working so late?’.”
Another entrepreneur we spoke to plans to sell in a two-year time frame, but is keen to retain confidentiality as he doesn’t want word getting out to staff. “I’m fully aware that we need to prep the business now,” he says. “The last thing I want is for someone to come in and find gremlins. The fear I have is that key staff will leave and take clients with them.”
Recognising the time the process takes if you want to maximise price, he plans to spend much of the interim making the business more attractive and says recurring revenue will be the biggest factor in achieving his aims.
He’ll no doubt soon find that once you commit to the process it can be hard to put on the brakes. “You find that you go past the point of no return,” says Richard Smith, who was a director of Moulded Foams when it sold to packaging business Linpac in 2000. “Events lead the sale rather than the other way around.”
The best way to retain control is to enlist the services of experienced advisers. Ash Mehta, who has led numerous exits and partial sales is now consulting on the sale of AIM-listed software company Raft International, which opted for a niche corporate finance boutique with a technology bent, “meaning we’ve paid a fraction of what we would have paid had we gone to a major player”.
In terms of fees, avoid fixed fees for your corporate finance adviser, instead agree a percentage of the consideration. This provides an automatic incentive. For law and accountancy firms, however, agree a fixed fee up front as this typically works out cheaper than being charged on time. Your corporate financier should be able to help set a fee.
Good advisers are arguably the best way to ensure the business thrives during the process. “The period between agreeing commercial terms and completion is quite long,” says Mehta. “It’s difficult for people running the business to be on top of issues and able to say what they don’t want advisers spending time on.”
Tamer Ozmen, CEO of Touch Group Plc, sold part of his business a few months ago and says that in order to get the deal through he took the CFO out of day-to-day operations completely. “The buyer kept changing the deal and we’re a small company with £10m revenues, so taking time out was a real pain. Going through the legalities is very draining.”
Ultimately, you’ll have to make a series of hugely important decisions about the structure of your deal. How long would you be happy to remain in the business? Will you accept paper over cash? Are earn-outs the best way to achieve top price? And, are you confident enough to accept loan notes?
Michael Rakisson, now of children’s shoe business InStep, previously sold a clothing business. He advises that you should be wary of being tied to a business once you’ve sold. “It was the most miserable experience and five years is a long time when someone is running your business. Don’t do it if possible, or do two years max,” he says.
PDD’s Gray, too, has seen it end messily. “You’re out of the business on the sidelines and unable to get involved, because while you think you would add something they’re more concerned you’d damage it.” Richard Lane of law firm Farrer & Co adds that earn-outs are seen as a highly necessary ingredient by buyers and a ‘gloss’ on the money for the vendors. “They will want to see your commitment to the business going forward and typically you might have to accept a three-year period. The expectation is that the owner stays for a minimum of a year, particularly if there is a lock-in period. You’re then effectively working on a consultancy basis.”
Finally, make sure the method of payment suits you. Paper is immensely risky but in some cases proves to be the best ‘investment’ you could make. One director, who asked to remain anonymous, says he actually rejected higher cash offers and went with an all-share offer. “I thought the shares would double in value. It turned out they tripled and I was able to sell for much more money. But it could have gone the other way. The dot com era was littered with similar deals that didn’t work out.”
He adds that there are also ways to reduce the risk should you accept shares, which is worthy of further exploration if you have an appetite for life on the edge. “You can get around being locked in for a year to 18 months by using options to reduce the downside risk, securing value in a certain band. You won’t have liquidity, but you will have certainty.” But, he says, in general, UK entrepreneurs tend to be more bearish and a mix of cash and shares is more common.
Before business taper relief, loan notes – a form of IOU to help reduce your tax bill – were popular. “They’re less so now,” says Mark Priestley, a private banker at Coutts, “but if you do accept them make sure they are guaranteed as the company won’t necessarily be managed as you would have run it post-sale. Whatever you decide, seek advice and enter the process with both eyes open. If you don’t, they’ll certainly be opened for you.”