How to sell a business: An entrepreneurs’ guide
Tips on selling a business and ways to exit a business
The climate for selling a business isn’t easy at the moment, with both mergers and acquisitions (M&A) activity and valuations down. A lack of available funding and investment are the main culprits for this demise, but the market isn’t completely dead. The problem is that investor confidence has disappeared and the banks and venture capitalists are all sitting on their cash and playing a game of wait and see.
“It’s not a great time to sell, because if people want to buy they cannot raise the funds,” says Gary Morley of accountancy firm Mazars. “The private equity guys are tending to sit on their hands because they just don’t know what the future is going to be like. Cashflow funding is almost dead – even asset-based funding is proving hard to find.”
Adrian Godfrey, of HW Corporate Finance, agrees that the market is tough for many businesses, although some sectors – most notably technology, healthcare and specialist manufacturing – are still attracting interest from buyers. Also, at a time when the government is pumping money into the economy, businesses in receipt of public sector contracts are seens as a good bet. “Anything with public sector work will attract lots of interest from the private equity buyers,” says Godfrey.
Thankfully, the malaise cannot last forever, and the chancellor is already considering methods of compelling the banks to start lending. But in any climate, selling a business can be a long and arduous process, so preparation well in advance of the big exit is well advisable.
Dan McGuire, managing director of Broadbean Technology, recently sold his business to Associated Northcliffe Digital, the online division of DMGT. He was surprised by the level and depth of the due diligence process required before he could sell his six-year-old business. “People say that you should start with the exit in mind. I don’t agree with that, but if you are going to sell your business in five years, then plan your paperwork,” he says.
Out of the blue
You might get a call tomorrow from someone that wants to buy your business. However, you should treat such unsolicited calls with caution as they often amount to far less than they originally promise. Never rule out that it could be a fishing exercise, or forget that even under a non-disclosure agreement, opening up the books to a third party is a risk. If word gets out that you are looking to sell, it can have a negative impact on staff, suppliers and clients. If you do get a call out of the blue, proceed cautiously and take it all with a pinch of salt.
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“People do sell their businesses as a result of receiving unsolicited offers, but it seldom works out as expected,” warns Morley. “The offer will have been based on public information, so when the potential acquirer discovers something in due diligence, such as the length of your lease, they can use it to reduce the price.”
But if you are receiving regular offers and considering an exit, there are ways to discreetly check out the market and get a good valuation. The value of a business is subjective, but it boils down to one thing: what someone else is prepared to pay for it. It also stands to reason that, in a competitive environment, the value will rise, and so adding more buyers or bidders to the mix is a good idea.
Darren Richards founded Dating Direct in 1999 and by 2006 had received several offers from potential buyers. Nonetheless, he decided to appoint a corporate adviser, Clearwater, which researched the market on his behalf and was subsequently involved in negotiating the deal. “By 2006, we reached the point where we were a leading player and couldn’t go any further in the UK. The opportunity was there; we were still getting people knocking on our door,” Richards says. “We researched the market, spoke to a few buyers and found that there were quite a few people who were interested – some of whom we wouldn’t have considered before, but turned out to be good potential acquirers.”
The business was later sold to the French firm Meetic for £30m, including the cash in the bank. Richards, after a short consultancy, exited the business. He says that the UK was a strategic prize in the market and he benefitted from the scramble to acquire. “There was competition in this market and I think that’s what made the business go for the amount of money it did,” says Richards.
Karen Darby set up the utility price-comparison website SimplySwitch in 2002 and by 2006 had realised that the time had arrived to cash in. “One of our competitors uSwitch had sold for a really fantastic sum of £200m, so we knew there was an appetite for price comparison services,” she says.
Darby correctly reasoned that there were buyers in the market that would be interested in SimplySwitch, having missed out on its rival. “I managed to track down uSwitch’s advisers, LongAcre, a corporate finance group. We thought there would be a few disappointed buyers who had bid for uSwitch, so we went to them to put us in touch with those people,” she explains.
It was a smart move and, following the beauty parade, which Darby refers to as a “mating ritual”, she eventually found her suitor in the form of DMGT, selling for a total consideration of £22m. However, just after the deal, the market was hit hard as energy suppliers announced big price decreases, meaning less demand for price comparison services. This meant that her earn out – about £5m in total – was wiped out although, fortunately, she had got the majority of her money from the initial payment.
“There can be situations you simply can’t control, such as the market changing,” says Darby. “We hit a plateau. We didn’t perform badly, but the earn-out was based on hockey stick growth.”
Striking the deal
“Negotiation is one of my strong points, but we were in hard-core discussions for three to six months,” says McGuire. “I am a dealmaker; a salesman, but this was the deal of all deals.”
The sale of a business is typically a gruelling process and can take many months. Due diligence also takes most entrepreneurs by surprise. If the buyer is acquiring shares he is also buying the risks and liabilities, and the lawyers won’t let anything go through unchecked. This means that they’ll want copious detail on everything including trading history, supplier agreements, leases, staff contracts, risk assessments and numerous other things that you probably didn’t think you would ever be asked about. But for you, as it was for McGuire, this will be the “deal of all deals”, and if you are facing a corporate buying team, then there will be a major mismatch in terms of experience. All of the above can be used to chip away at the price, and even when a deal looks all set, often the buyer can make a last minute attempt to lower the valuation.
Private equity companies, as you might expect, are renowned for playing hardball. “They often want to chip at the valuation. I have only done two deals in the last 20 years where they haven’t,” says Morley.
Darby had appointed a corporate adviser, who, alongside her finance director, waded through the details, as she knew that her experience was no match for the buyers. “To them it was like shelling peas,” she says.
McGuire, a confident salesman, didn’t appoint a corporate adviser, relying instead on the experience of his non-executives, as well as his own selling skills. But it was a tough journey. “If you aren’t a dealmaker, get some help with the deal. I have struck some big deals before, but this was a different level,” he says. “Don’t be afraid to get someone along who can do it for you.”
The other benefit of using a corporate adviser is that, if there will be an earn-out involved, you can preserve the relationship with the new company’s management. Generally, it’s easier for a third party to really negotiate hard on your behalf. Also, corporate advisers have the incentive to maximise value, as they primarily earn their fees through commission. Ultimately, it depends on the size and complexity of the deal and how strong your in-house team is. But for many they are a good addition to your advisory team.
Life after the exit
You would probably like to take the money and walk, but for many acquirers, the owner-manager is regarded as one of the most important assets. This frequently results in an earn-out, with the former owner becoming an employee. This often doesn’t sit easily with the vendor and it’s a stumbling block for many sellers.
Darby was not comfortable as an employee and thinks most entrepreneurs are similar. “For me, it was difficult because I am not used to being told what to do. I don’t like the feeling of being a small fish in a big pond. Can you imagine Stelios or Branson reporting to someone else? Well I’m the same,” she says.
But, as acquirers are increasingly keen to keep key staff on board, there is some evidence to suggest that large acquisition vehicles are making themselves more attractive to sellers as possible places to work. By the time Broadbean Technology was sold to DMGT, its acquisition team had made around a dozen deals, so McGuire spoke to entrepreneurs that had sold their businesses to the group, and listened to their stories. “The entrepreneurs said: ‘You will still run your business, but you will have a big company behind you.’ It was important that strategy and operations still remained with me,” says McGuire. So Broadbean will keep its name and brand, stay in the same offices and retain its staff – and hopefully the agreement will be mutually beneficial, as such agreements can be if there is understanding and consent on both sides.
The final chapter
You set up your business for reasons both personal and financial. So when you sell it, consider both again, and not just the latter. Morley recounts a tale of a family-owned clothing business where the shares equally belonged to a husband and wife. He wanted to sell, but she was horrified by the idea, even though she didn’t work in the business. At the root of the problem was the fact that, after years of marriage, their relationship had faltered and the husband’s proposed retirement brought it all to a head. Eventually, he was able to sell the business, but only after a divorce.
Hopefully, your retirement will be happier. But even if you aren’t planning on heading out to the golf course, you should consider the next stage of your life. For many, this often means a perusal of the property market and for Richards this actually led to a new business idea. He was looking for property overseas, but felt that the websites on offer weren’t giving him the information that he required as a potential buyer. Just a few months after exiting from Dating Direct, he founded PropertyIndex.com, which aims to make life easier for buyers.
“I started looking at the property market overseas and at the websites, and thought I could do better. So before I sold the business, I thought that this was something I could do,” he says. Selling your business isn’t always the end, but rather the start of the next phase of your life. So think carefully.
Ways to exit a business:
Often this can be to a competitor, but also look for non-obvious trade buyers, which aren’t in your sector, but might want your company for strategic reasons. Such acquisitions, made to enter a new market or extend geographical reach, will invariably lead to a higher valuation. Talking to direct competitors is a risk, as you are divulging confidential information, and if it becomes known in your industry that you’re looking for a sale, it can work against you. But your competitors know your market and can remove costs from your operation after sale, such as the accounts department.
Management buy-outs (MBOs)
This might seem to be the easy option, as your buyers are already in-house, but while MBOs are great for the acquirers, the vendors can get burned. As Gary Morley, of accountancy firm Mazars, explains: “For a vendor, the management team becomes the enemy within, as they don’t want to pay top dollar for the business. Immediately your loyal and dedicated staff have goals that are opposite to yours.”
Initial public offerings are often seen as an exit, but this is a mistake. Unless the deal is very large, no broker will let you take a huge amount of cash out of the business. Also, following flotation, is will be difficult for you to sell many shares without impacting on your share price. Flotations are great for raising money and profile, and can aid growth, but they are anything but synonymous with an exit.
The problem with mergers is, well, there’s no such thing. One business will always buy the other and one culture comes to dominate the company. Mergers are acquisitions with a PR sugar coating made to protect certain sensibilities.