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.
