How to plan selling a business
Why you should start exit planning immediately
Entrepreneurs have their exits as well as their entrances, and if they know what’s good for them, they plan as well for the one as for the other. Growing Business explores some of the issues you’ll need to consider before selling up.
No matter how much cash you or your backers have invested in your business, if you are an entrepreneur worthy of the name, you will have made a much greater investment: your heart and soul. It’s not just a matter of your time or your money. The ties that bind you to your business are more like the ones that bind you to your children. Whether they behave well or badly, they have a claim on you that can never be entirely broken.
That said, even children have to leave home sometime. You should not, says Andrew Haigh, managing partner for the Entrepreneurs’ Client Group at Coutts, underestimate the emotional impact of quitting a business you have built up over the years, even if your departure has been planned from day one. And he should know, he handles more than 18,000 company owners in this business unit, which recently published The Long Goodbye, a comprehensive report on the experience of entrepreneurs going through the exit process.
Letting go is hard to do, according to Haigh: “They say moving house is stressful, but selling a business is worse,” he says. “The mechanics are well enough understood, but don’t underestimate the emotional strain it will place on you.”
Not what you would expect to hear, perhaps, from a banker, although many of Haigh’s clients only discover private banking once they have reached the clear blue water beyond the turmoil of the exit, and find themselves wondering what to do with all that cash.
“For many owners, exiting is the one opportunity to realise significant personal wealth from the business. However, it is also a moment that few people are fully equipped to deal with,” he says.
Failing to prepare…
If entrepreneurs are not prepared, perhaps it’s because in the euphoria and passion of starting up and growing a business, they didn’t consider where it was heading. Robert Diamond, founder and chief executive of marketing consultancy Emnos, admits he could have netted much more from the company he started in 2001 had he focused on making it attractive to investors.
“The value of the business now is six times what we were paid for it, and that mostly comes from stuff done by us rather than by our acquirer,” says Diamond. “If I were to start up a business again, I would think first about what could be done to drive the exit valuation.”
The Coutts report found that a third of entrepreneurs felt unprepared when the time came to sell, particularly if they were sole owners. Where an outside investor has money in the business, there’s usually a more robust exit plan. The rest tend towards complacency, believing it will take them less than a year to sell the business, whereas in reality it will probably take them twice that time. It’s not that business founders don’t think about exiting almost as often as men are reputed to think about sex, but the reality just doesn’t match the fantasy.
These ‘exit obsessives’, who ponder exit strategies daily, weekly or monthly, should please Sue Peters, who tells the small business leaders she teaches at Lancaster University Management School that exit strategies and succession planning should begin 10 years before departure. However, a high proportion of entrepreneurs will have been through the entire cycle twice within that timescale.
Take Ian Merricks, who between 2002 and 2008 acquired, turned round and sold education supply firm The Student Planner UK, raised capital for the management buyout of city guide Itchy, and founded an investment and turnaround company called White Horse Capital. When he bought The Student Planner it was within a fortnight of going bust.
“I thought it was a company that could be made successful if we could build scale,” he says. With days in hand, Merricks redesigned the business model, and by 2006 had a company that was supplying college work diaries to 53% of all 16 to 19-year-olds in full-time education.
“We had reached a tipping point in terms of market share, and I wanted capital for my next venture,” he says. Merricks had the option of leveraging The Student Planner to the hilt, or selling it. “It was not a hard decision since there was very little in the way of synergy with Itchy,” he recalls.
Patterns soon begin to emerge once you look at businesses that, on the face of it, appear very different. When Diamond founded his retail analysis business in 2001, he knew he would want to sell one day. “I knew I would either be out because it folded, or out though an exit,” he says.
Like Merricks, Diamond ended up selling to a firm with its eye on the UK, in this case Europe’s largest customer loyalty operator, a German firm backed by a major venture capital fund. He chose this buyer because it presented the opportunity to scale the business that he wanted. “An alternative would have been to sell to a marketing communications operator that would have absorbed us as an add-on to its core business,” he says.
Timing it right
There must be a host of businessmen and women who wish they had looked more closely at the offers they had before the mergers and acquisitions (M&A) market disappeared. After all, the Coutts report found that 70% of entrepreneurs had already received one or more offers and turned them down. But their reasons for doing this had little to do with hanging out for a better deal.
The timing of any exit is more likely to be dictated by a pre-set goal, as in the case of REaD Group’s founder and chief executive Mark Roy, who, while he hasn’t yet sold up, is preparing for exit by the time he is 50, two years from now. “Our philosophy has always been that we only get one chance at this, so we need to get it right. Therefore, we involved an M&A team early. Bearing in mind the recession, our exit aspirations have probably been knocked back two years,” he says.
Entrepreneurs are driven people. Once the initial challenges have been met and the business is running well, they can become bored. While Dawn Gibbins could never occupy the same sentence as the word ‘bored’, her decision to exit was a reluctant, but inevitable one. Flowcrete, the industrial flooring company she set up in 1982 with her father, grew from a £40,000 turnover in 1982 to £40m in 2007.
Being a young woman in a man’s world was never a big deal, says Gibbins. “I just had to learn to become more confident and self-assured,” she explains. “Setting up your own business has to be the best way to improve your confidence in a male-oriented industry.”
When Gibbins couldn’t get the Flowcrete management team to come on board with her ideas for combining her passion for health and wellbeing with her existing business, the way forward was to sell up and start a new venture. “I worked with the management team to secure either a trade sale or a management buyout, but in the end it was one of our suppliers who bought us,” she says. “Leaving your family behind is very emotional. I miss them terribly, but the passion in my belly to do something new has possessed me to move on.”
Take advice… carefully
Manage your advisers as much as they manage you, as they cannot replace the value of tapping into entrepreneurs who have exited successfully. Hugh Chappell has become an expert in juggling, having founded and sold two overlapping businesses between 2003 and 2008. The first, the consumer technology website TrustedReviews.com, was so successful that Chappell was getting approaches within its first couple of years. “Never sell too early,” is his counsel, so instead of exiting in 2005, he acquired a second online publication called bit-tech.net, specialising in gaming.
Having developed TrustedReviews.com to a point where he had met his objectives, Chappell appointed an M&A adviser with in-depth traditional and digital media experience to find a buyer. “I sold TrustedReviews.com in October 2007, retaining bit-tech.net in order to develop it further,” he says. “I sold bit-tech.net in October 2008 to Dennis Publishing.”
Chappell believes deciding when to sell a business is a bit like a game of blackjack. “It is important to recognise when the right time has come to leave the table,” he says.
Unlike Gibbins, Chappell has not yet decided what he is going to do next. After selling bit-tech.net, he stayed with the firm for six months in a consultancy role to make sure the handover was smooth. This ability to jump between roles, and sometimes to carry them out simultaneously, may not be essential, but it certainly helps.
He relates how, during the year before selling his business, he was doing his day job as managing director, then when the staff had gone home, tackling the massive amount of work connected with satisfying the due diligence requirement. You might not want your people to know that the business is about to be sold, he says, so all that work has to be done in your own time and without being able to delegate any of it to your management team.
For Chappell, help to find the right buyer in the complex online media market was vital, but often the process is more straightforward. For Merricks there were only a few potential purchasers for The Student Planner, so advisers could add little. The only two serious UK competitors were both keen to buy, but in the end were outbid by a European player that wanted a piece of the UK market. The whole deal took about eight months. “They made direct contact with us, and it was not too difficult to put together a simple though detailed vendor pack,” he says.
In each of these cases, the company sold because of its value in the market. “If an entrepreneur either neglects to build inherent value in the business, or if its value rests mainly in the person of the founder, then it’s harder to sell,” argues David Molian of Cranfield University. “Only 7% of businesses offered for sale attract a buyer, partly because they don’t know how to market themselves and partly due to the fact that there’s no value in the business.” An accountancy or law practice may be thriving, but may lose all its clients if the business changes hands, he points out.
We all think we’d like to retire early, but the idea of doing nothing is anathema to most entrepreneurs, even when the exit gives them that option. Only 17% of respondents to the Coutts report thought before they had sold that they’d like to put their feet up. More than half remained involved in the business post-exit, and 40% qualify as serial entrepreneurs, starting or acquiring a new venture, proving that building a company is a hard habit to break.
Others like the idea of using their wealth to invest in or support other people’s businesses. In his early 30s, and with eight media acquisitions behind him, Merricks is doing both. For Gibbins, the next business was the raison d’être for the exit. Chappell, meanwhile, admits he hasn’t decided where to turn his attention.
The report confirms that business builders are mavericks. It identifies interesting trends, such as the difference between pre-exit aspiration and post-exit reality, plus some worrying ones – 59% of entrepreneurs overlooked their financial planning until the last minute, although 79% agreed it’s an important part of the process. “Alarmingly, two-thirds of entrepreneurs are risking long-term business success by not giving proper thought to their exit strategies,” said Haigh. “A successful exit grows from months, if not years, of careful preparation.”
The golden rules of exit planning
- Always have an end game in mind
- Build your exit path into your business plan, but prepare to be flexible
- Be realistic about what you can achieve from the start
- Keep an eye on profitability
- Leave scalability in the business
Life after exit
Triumphs of experience over expectation
- Serial entrepreneurs are owner-managers who want to use the capital and experience gained to start up another business. Pre-exit, 35% say they want to do this, but the reality is that 40% will become serial entrepreneurs
- 28% think they will invest in the potential they identify in other people’s businesses, but only 11% will actually join the ranks of the business angels
- The third most popular aspiration for entrepreneurs before exit is to get involved in social enterprises, and 19% would dearly like the chance to make the world a better place – although, in reality, a mere 5% become social entrepreneurs
- Only 17% admit that they intend to do nothing more strenuous than gardening once they lay the responsibilities of leadership aside. In fact, 25% are happy to sit back and enjoy the money and independence that entrepreneurship has brought them Source: The Long Goodbye, Coutts & Co
The long spoon
How to choose advisers
- Choose your advisers carefully – accountants and lawyers who know your sector, for example
- Select people you get on with – personal chemistry is important
- Hold a beauty parade before you commit – look at their track record
- Make sure you understand each other – you, their processes; they, your goals
- Don’t be afraid to take control – get the best, not the most convenient deal