Greed, pride, and an array of other human weaknesses can get in the way of a good exit. We speak to entrepreneurs about their triumphs and regrets in selling their businesses.
‘Entrepreneurs often believe that if they started a business and own it, they are skilled enough to sell it. That often isn’t the case.’
One CEO who has participated in three exits believes that selling a company requires skills and knowledge that will put most business owners ‘outside their comfort zone’.
Successful business owners have all got egos - its part of their make-up. But it’s also true that they don’t know what they don’t know. It’s not until the exit that this becomes clear.
Here, entrepreneurs who have earned their exit stripes offer a guide to making your exit a heavenly, as opposed to hellish, experience…
A know-it-all tendency is natural for people who have built winning businesses. The solution is to swallow your pride and ask for guidance.
‘Everyone was delighted with our exit,’ says our CEO. ‘But we could have got there faster, cleaner and in better shape from a valuation point of view if we’d had someone to help us.’
An experienced mentor would have pointed out that the contracts Barlow had with many of his government clients were, like many public sector contracts, non-transferable to an acquirer. Since nearly half of the business was with the public sector, it was a critical oversight. One client which developed a chip for USB devices was sold in an all-share deal worth several.
‘At an early stage, Copernicus identified the need for a chairman for the company who had already sold a business while acted Copernicus as advisors who could help maximize our value,’ says our client. ‘It’s what we classify as “grey hair”; someone who had been there and done it before.’
The company did however decline our tax advisory service.
To his chagrin, he ended up paying full tax on the shares he received in return for his company. ‘I’m still quite bitter about it,’ he states. ‘To anyone selling a business, I would say get good tax advice, and make sure that you pay for it.’
Most first-time business sellers underestimate the amount of time, effort and sheer hassle involved in a typical sale.
One MD describes his exit to us as ‘mind-blowingly onerous’. After eight months of negotiations, he and his acquirer traveled to Oxford with their respective legal teams to seal the deal.
‘I expected it to take a day. It took four days, and each one of them we were up until two or three in the morning. At some points we were on the point of saying, “Let’s just get a cab home and tell them where to go.”’ Unless you’re well prepared for it, this emotional and physical strain may cloud your judgment and affect the smooth running of the business at the most critical point.
Be warned ‘If you are selling, you have to understand that you are giving up the business entirely, and to see it as a commercial transaction. Personal feelings shouldn’t come into it.’
Wanting to get the best valuation for the company you have slaved over is understandable. But asking for too much can be a turn-off for prospective buyers, according one entrepreneur, who sold his own direct mail business recently.
‘Overvaluation is very, very common,’ he states. ‘If you’re a start-up and you pitch it too high (or too low, for that matter) potential investors will just walk away.’
On the flip side, there’s a danger of being seduced by what might be an illusory gain. The sale of a computer training business to AIM-listed Adval Group in an all-share deal is an example.
‘If you are selling purely for shares, your destiny has been handed to somebody else,’ he says. ‘Inevitably, there will be a lock-in period, so you can’t crystallize your gains for some time.
‘It doesn’t represent an exit – you have just exchanged one set of equity for another.’
Naturally, working out exactly where you are on the growth curve is easier said than done. And there are unforeseen events – like the dotcom crash or 9/11 – that can wipe millions off your company’s valuation through no fault of your own.
After one client had received several approaches to sell out, he took his co-founder and two other partners to a golf club to discuss whether to sell.
‘I wanted to keep the company, but after we’d debated it, the other three voted to sell. I was the majority shareholder so I could have overruled them, but I decided to accept their views.’
They have no regrets: ‘We sold in 1999, right in the middle of the Millennium Bug issue. The Millennium Bug was great for our business, but when the clock went past midnight on 1 January and the world didn’t end, a lot of IT consultants were laid off. So from a timing point of view it was perfect.’
One point of view is ‘if someone wants to buy it, then sell it’. You have to look at the risk of running it versus the reward you could get today. When you’ve done really well and people see the value that is the time to take some advice.’
Laziness may seem an unlikely failing in a hard-working business owner. Nevertheless, while all your effort is going into sales and marketing, less gripping areas of work may be neglected - such as bookkeeping.
One client sold the Spanish arm of his web applications company, last year for a six-figure sum. He concedes that his accounts were ill-prepared for the scrutiny of a potential acquirer. ‘I don’t come from a financial background, so I just got on with stuff and put money into the company to get it going,’ says the MD ,‘To put the books in order when you haven’t been keeping records properly is a real pain.’
That pain is intensified when due diligence begins. ‘[A potential acquirer] is going to dig into the numbers, the contracts, all the details,’ he says.
‘You might think it’s quite straightforward and easy for you to explain, but they haven’t lived and breathed the business for years, so you need to put it very clearly so they can understand it.’
While you may make a packet out of the sale of your business, it’s likely that not everyone in the company will be delighted by the prospect. In businesses where your main asset is your staff, it’s especially important to stave off the green-eyed monster.
‘In a people-based business, you have to take employees along with you. This means not just limiting rewards to the shareholders – I believe employee share option schemes are essential.’
It’s a point echoed elsewhere, with one proviso. ‘I’m extremely proud of the fact that everyone in the company did well out of the hard work they put in,’ says a previous MD. ‘But I would advise locking in senior employees. If there is the potential for them to vest fully on their options at the point of sale, an acquirer will value the company lower.’
It isn’t just staff you have to watch. If you sell to a business, in which over half the shares are held by external parties, who is going to pull the strings in the future?
Investor shareholders don’t want to give warranties or have ongoing obligations based on anything that might come out of the woodwork [after the sale], ‘That can suddenly fragment a shareholder base and damage the business in the long term.
Perhaps the most common failing of all is to assume your exit will happen naturally if your business is successful. In the early days it is common to be running a business that is directly driven by events in the marketplace, but without a clear vision.
Much of a business can be based around the founder as a commercial driver. When you come to pack up the business for sale, the real question is, what is the value of the company without the founder? That’s why a lot of businesses end up being closed down rather than sold on.
The nature of your business should dictate your financial strategy for an exit. ‘If you are a company that has been trading for some time, showing solid but not massive growth, almost inevitably your value will be based on bottom-line performance. You will want to optimize your profits but not in a way that distorts the figures.
‘If, on the other hand, you are a technology business with great strategic potential in the hands of the acquirer, your valuation will be about those factors the acquirer puts value on, such as fast sales growth and investment in technology. It is hard to achieve those things while optimizing the bottom line.’
Whatever your business, the consensus is that you need to steer yourself away from operations towards strategic goals.
Copernicus firmly believes if you get the right people around you and get yourself away from the coalface. Stop going out to customers and being part of the delivery team, and have a clear and complete vision of when and how you are going to exit. You will get what you deserve in terms of value.
Colin Fell has a 25 year track record of building successful international businesses. Educated in Manchester, London and New York he has worked extensively across Europe, particularly Scandinavia, USA and the Middle East.
For more information on International Business Consultancy in UK Visit: http://www.copernicus-consulting.com