Sold: 8 entrepreneurs share their exit insights
Eight entrepreneurs who have sold their businesses reveal what is like on the inside when you sell
When is the right time?
It’s one of the toughest questions you’ll face and you’ll never really know the answer to it – even after you’ve sold. The consensus among the guests is that, first off, you need to be clear about your reasons for selling.
Secondly, sell before your business reaches the summit. Knowing when that is may be difficult, but buyers need to know that “there’s something left to buy”, says Destini group managing director David Collett. He’s sat on both sides of the negotiating table. Having sold a healthcare group, he’s now snapping up small firms of independent financial advisers. “A company with scope to grow, increased sales and reduced costs is the ideal,” he says.
Mark Adams believes he will only achieve the likes of Collett’s pre-requisites if he concentrates on raising performance. Then, the time to sell will present itself organically. Having sold his previous business to take over IT company Cobweb Solutions he is focused on making the company worth something, he says. “If you don’t do what’s core to a company there won’t be an exit opportunity anyway.”
“There’s a conflict between vision and reality. We have a vision of what the world will be like in three or four years’ time, but the reality may be very different,” says Adams. “That has been proved in the last three or four years. You don’t know where your market will be, what the appetite for technology companies will be at that time. My view is you build a proper sustainable business.”
But even if you are clear about reasons for selling or you exit before you reach the top of the curve it won’t matter one iota if you don’t have a buyer. And if you do find a buyer, it won’t necessarily be the ‘right’ one, so an acceptance that you may compromise on some of your wishes is crucial. It’s not unusual, according to one guest to initiate the process and then find the ‘best’ buyer isn’t around, by which time it’s arguably too late to withdraw.
Collett puts that down to investment in the due diligence process. “Once you’ve started down that track you might have spent £20,000, £30,000 or £40,000, making it difficult to turn back,” he says. And Televoice’s CEO Pip Errington, notes that many get preoccupied with selling, to the detriment of the company’s performance, making it a less attractive proposition for prospective buyers and thus forcing a decision.
The message on timing appears to be don’t over-think about selling, just grasp the nettle when the opportunity that you think is right comes. To emphasise the point, Roy Gunter cites the example of Charles Dunstone, the Carphone Warehouse founder and Charles Wigoder, the founder of People’s Phone who chose startlingly different routes. “I’ve known Charles Dunstone since he had one store on Marylebone Road. Charles Wigoder, on the other hand, raised a whole bunch of money, floated and did all these great things. But every time I check the high street I can see Carphone Warehouse, but not People’s Phone. The reason is he sold to Vodafone for £77m. One saw the market as embryonic and going to be huge and will probably get a better return and the other thought of the money he could make now.”
The Emotion of selling ans loss of control
“Emotion always gets in the way when it’s time to sell your first business,” says Collett. “If you don’t take that out it’s the major block.”
Cobweb’s Adams agrees, although knows it shouldn’t play too big a part. “Selling what was a family business was emotional. Yet it shouldn’t have come into it. It’s difficult to think like that when you’re in there, though now I can think about it pragmatically.” He’s sure he won’t have the same mental barrier to overcome with Cobweb. “The company has huge prospects. I can look at the realities rather then the emotional side. Whatever we do with Cobweb there will always be another opportunity,” he states.
Televoice’s Errington, admits that much like selling a house to somebody who appreciates what you’ve done with the interior decoration, she would prefer to sell to buyers not intent on a major overhaul. “Caring passionately about the product and what it could do for people has a huge impact on my thoughts on who I’d want to sell it to, regardless of the money. If you really care about the offering and ethos, you have to be willing to sacrifice quite a bit because I’m not willing to give in on the company culture, what it does, what it means to customers and its potential.”
Selling as a means to an end is something she finds hard to contemplate, but she accepts others may be able to bring fresh impetus. “There are people better placed to take it further. I have a fairly pragmatic view. I consider myself competent to take it to the next stage, but to take it further there are other people.”
Ray Taylor is a slightly different beast. “I’ve only ever started a business to sell it or float it in future, which is selling over a longer term,” he says. “The ideal situation would be to start today, sell it, float it and get rid of it in six months or even less.”
The ‘virgin’ of the group, Michael Smith is clearly one who is emotionally tied-in with the business and has yet to face the possibility that new owners might choose to dispense with his services or else leave him with little control over the direction of the company. “There is a fear that with a minority stake we would lose control. It does scare us. The culture thing is extremely important. It’s not just cash – it’s about them understanding the business, retaining the staff and not relocating to a non-descript town or suburb.”
Whoever buys Firebox, Smith expects to stay on for a handover and is keen to do so, even retaining a stake. “I think it’s a fantastic business and no matter who we sold to, I would want to retain equity and stay with the business.”
Where does the valuation come from?
Through experience, our guests have come to the same predictable conclusion. “The value is the price the buyer is prepared to pay and what you’re prepared to sell at,” says Taylor, as if he has repeated the mantra many times.
The only reason to get a valuation is to have some idea of how fair the price being offered is. “Entrepreneurs always have a tendency to over-value,” continues Taylor. “The problem is, it’s a bad habit to encourage.” Collett blames people around owner-managers, including advisers, for helping to inflate the price to unrealistic levels. Taylor concurs. “It’s got a lot to do with flattery. If you go to a transfer agent the first thing they will do is flatter you. They want to get a fee out of you – they won’t do that by telling you your business is worthless. If you go to an intermediary/adviser it’s a safe bet to say it will be overvalued. And there will be a tendency to be greedy.”
As a buyer, and depending on where a company stands in relation to the market, Collett, says six to 10 times profits is a standard measure. Deciding which end of the spectrum the company is at will come down to other factors, such as the buyer’s determination to proceed and the sentiment of the market towards the given sector.
Cobweb’s Adams had a different experience. “The agenda was already set when it came to selling. In addition there was a certain amount of asset value in the company. From my point of view, the rationale behind what I was selling was that I wanted to go on to something else. The value had become somewhat irrelevant as it had become a means to an end to get to where I wanted to be.”
With “two or three seriously interested” he was in the enviable position of the prospective buyers fighting an auction, which led to him achieving the expectations he set out with. “There are so many different agendas involved and they all affect the valuation,” he says.
Taylor says having a clear exit strategy long before you go to market is key, as numerically most businesses are never sold and instead are run until the owner retires or dies. This leads to owner-managers maximising their earnings within tax regulations. “If you plan to sell there comes a point where you have to stop paying a salary to your wife for doing no work, pay yourself a salary and stop hiving off dividends and anything else you can get away with. It is the one time when it becomes advantageous to be open about the profits that the business is making.”
The question, he says owner-managers have to ask themselves is: Are you running the business as a means of avoiding tax or as a means of creating value for yourself and shareholders that you will eventually exploit at some time in the future?
The best position to be in to achieve the highest possible valuation, summarises Taylor, is to be happy to continue. “It puts the negotiation ball in your court. As soon as you take it to market you’re pushing the price down.”
Marketing to buyers
It’s often the case, says Blue Strata’s Taylor, that businesses don’t let the market know they exist until reaching the point at which they want to sell. “There are a lot of good, successful, profitable businesses out there and nobody knows they’re there,” he says. “They’re worried about talking to competitors and don’t want them to steal their business.”
“They don’t talk to the press because they think it’s a difficult thing to do. But even if you don’t want to do it yourself you can employ a PR company, which costs much less than other forms of marketing. If you make potential buyers aware that you’re there, they will come after you.”
He points out that some of your bigger competitors are also the ones most likely to buy you. “And you don’t have to give them all your secrets,” Taylor concludes. Collett agrees that money spent on communications, such as working with the press, is money well spent.
Adams marketed his former business, Forrest Press, through intermediaries and the company was eventually sold through a contact of his accountant. “Going through intermediaries created the interest of some punters. But it was the introduction that created the sale.” He admits though, that when he started the process he had no idea how to do it and being in technology looked to the web first.
How do you handle the issue of staff?
As a buyer of businesses David Collett is unequivocal. “In keeping an entrepreneur and their staff on-board, shared equity matters. One of the things we insist on is that 10% equity has to go to the staff. If not, it’s a dealbreaker and we’ll walk away.” As a result, 70% of Destini is owned by the staff.
Fortunately, many owner-managers appear to value the loyalty of their staff enough to want them rewarded for their efforts. Adams certainly falls into that camp. “The last thing you want is staff thinking you’re selling them down the river,” he says.
Taylor says that while he “wouldn’t accept a penny less for a particular employee”, he would consider making exceptional payments to reward loyalty. “If I was really that bothered about an individual employee I’d write them a cheque if it solved my conscience.”
At a previous company Errington reserved a percentage of equity for key employees. “It goes back to the respect you have for employees. You give them stock assuming they do X, Y and Z.” But in her case, the company that bought the business was initially against it. “I explained that if you own a bit of something you’re far more likely to put more in.”
She warns though, that doing it retrospectively is a nightmare and any buyer will lose key staff. “People don’t think enough about the staff when a business is sold. It happened to me in my early days as an employee. I was headhunted and left,” she says.
Beyond rewards, there is the issue of ‘Transfer of Undertakings’, which, as Taylor points out, is an obligation. “Under English law employers have responsibilities to all sorts of people, not least employees. And that’s a responsibility you carry over if you’re selling a business.” Equally, he says, it is your ‘duty’ to the buyer of the business to pass staff loyalty on. In many ways the process ends with ensuring you don’t turn out all the lights.