Friday, May 4, 2012

Do I really want to sell? The four reasons people sell their businesses.

Written by Neil Ackroyd

In my experience there are four reasons why people sell businesses. Every rule has its exception, however, it is very important to consider whether you fit one of these reasons before commencing a process. The cost and disruption to a business of an abortive sale process is immeasurable and can be avoided to a certain extent by considering these four factors up front. I would certainly be exceptionally reluctant to accept a client who does not fit into one or more of these categories for the client’s sake as well as the sake of my team and my bottom line.

I believe that there are only 4 reasons that people complete transactions when selling. 
a) Retirement/completing a plan
b) A fundamental shift in your life priorities
c) The business not being fun anymore/outgrowing your skill set
d) An exceptional cash offer or exit opportunity

Looking at these reasons individually;

Retirement/completing a plan
Many owner managers have a long term retirement plan or exit plan. The commonality of these two areas is that they both give you a clear plan for what you are going to do after the sale of the business. This is the key aspect to whether this is a reason that makes sense for you. If you have a plan that involves sitting on the beach, playing golf or even starting a business in another area then you are onto a winner. Any project to sell a business where you have nothing else to do afterwards should be considered carefully.

A fundamental shift in your life priorities
I have had many clients over the years whose priorities have shifted dramatically. Sadly this often results from a change in life circumstances. Possibly a family or personal illness or tragedy. However, it can also come from good news like the birth of a child or grandchild. This is quite often a stressful situation also because after years of enjoying running a business, and it in fact being a driving force in an individual’s life, it suddenly becomes a place that is stopping them doing what they want, however, they feel a responsibility to be there for staff or to safeguard assets. In this circumstance the sale of the business is an excellent route to consider.

The business not being fun anymore/outgrowing your skill set
The business not being fun anymore or the business outgrowing the skill set of the founder is really quite often the same reason. The first way of saying it is just a way to preserve ego. However, there really is no need for that and absolutely no shame in that reason. The skill set required to start and grow a business to the critical mass of an SME is an excellent one to have. The skill set to grow an SME to the next stage is also an excellent skill set to have. The individuals having these skill sets have very different motivations, traits and behaviours. In my experience it is very rare indeed for an entrepreneur to be able to become a professional CEO and even rarer for a professional CEO to have the creativity and dynamism to be able to be an entrepreneur. These are just facts of life and it is a powerful individual who is able to admit that the next stage of growth is not consistent with their skill set. It is often noticeable that, in this situation, the owner manager is feeling constricted, bored and often confused. This is a very common problem. Although selling is not the only solution to this problem, in my experience more owner managers are capable of becoming professional CEO’s than an effective Chairperson managing a professional CEO (but an entire new website could be dedicated to that as a topic). 

An exceptional cash offer or exit opportunity
This last reason needs little explanation. Reasonably commonly there are short lived and extreme market conditions in niche markets that can offer exceptional exit opportunities. These are areas where you see multiples well into double digits being offered. Biotech was like this prior to the credit crunch and in certain areas still after, telecoms re-sellers in the UK are experiencing such market dynamics at the moment. Clinical trials supply chain companies have had many years of exceptional conditions. If you own a business in a market experiencing such a distortion or if your company very specifically fills a niche desire for one other business then you should consider the deal. There is nothing more soul destroying than saying no to a deal and then working for another 10 years and selling when you want to, and your ultimate exit plus the ten years of profit still being less than the price you said no to (and yes I have seen this happen and heard of it happening many times). However, the other note of caution I would add is similar to the retirement reason. Even if you still sell for a stellar price make sure that you have some sort of plan of what you are going to do next.

The common theme in the first 3 reasons is that the owner manager wants out and is trapped. This is a unsatisfactory position to be in and is unique to the owner manager. A corporate manager or employee will typically have a 3, 6 or 12 month notice period they cannot even be held to this provided they don’t want to move to a competitor. Therefore they can walk up to their boss and hand in their keys and passes. The business will go on without them and no-one will blink. The owner manager is rarely in this situation and often feels a deep responsibility to staff and the business for the years that have gone before. Therefore the decision to sell (in the first 3 reasons) is driven mostly in my experience by a need for freedom and the continuation of the business rather than an overt desire to maximize price or make themselves rich; indeed most of them are already rich.

In conclusion, if you don’t fit into one or more of the top 4 reasons for selling I would think very carefully about what you are doing and why. When considering whether to work with a prospective client our single most important criteria is the likelihood of a successful legal completion. A prospective client doesn’t fit into one of the top four areas is far less likely to complete a deal. I have learnt more than once that such a client can realise mid process that they don’t really want to sell, this a extremely bad for the client and the business and it is very worthwhile considering these points very early on.

Tuesday, May 1, 2012

Selling my business – I have been approached to sell, what do I do?

Written by Neil Ackroyd

So, you have been approached by someone wanting to talk about buying your business. This can be an exciting time but it can also be very stressful and confusing. As owner managers we are often experts in our own field and to a certain extent we can be jacks of all trades. However, in my 16 years in lead advisory I have very rarely seen a fellow owner manager who has experience and skill in selling businesses. It is a very specialist and subtle area and there is a lot that one can do wrong and those mistakes can be the most expensive mistakes of your entire career.

Here are some simple questions to ask yourself, things to consider and steps to take that should help you in this time.
  1. Take a long hard look inside you and decide whether you really are interested in selling.
      In my experience there are only 4 reasons that people complete transactions when selling. You should really consider whether or not you fit into one of these categories.

  •  Retirement/completing a plan
  •  Fundamental shift in your life priorities
  •  The business not being fun any more/outgrowing your skill set
  •  An exceptional cash offer or exit opportunity
These are discussed in much greater detail in my blog: Selling my business – Do I really want to sell?

If you have decided that you do fit into one of these categories and that it is worthwhile considering the other factors then please read on. If you are only interested in reason 4 and an exceptional cash offer then by be very careful on the other factors and make sure that there is significant evidence that you will get an exceptional offer. A process to sell that is aborted should be avoided and a little bit of professional advice at the earliest possible stage could avoid that (and could even be free, it’s amazing what people will do to build a relationship for the future).

If you genuinely fit into none of the categories or do not believe you will get the exceptional offer that the forth item describes, my strong advice to you is to politely reject the approach, stop reading this blog and get on with your life happy in the knowledge that the path of continuing to run your business is the correct route for you.

     2.   Look at the person making the approach – are they a real potential buyer?

Here I feel embarrassed for the practice of certain elements in my industry. Some businesses in Corporate Finance believe that it is a valid business practice to write to owner managers claiming to have a client interested in buying your business. Now while some of these letters might well be genuine, the majority of them are a highly disreputable attempt to get you talking about a deal with the intention of you appointing them to broker that deal on your behalf. Do not be fooled by the size of firm also, some quite large practices feel this is an appropriate way to win business. Whilst I have experienced this happening, I have never, and no company I have worked for have ever done this and I abhor it as a practice, it figuratively (not literally) makes my blood boil. That said, my annoyance with it is that it works and clients fall for it. As you would expect the “brokers” who do this are not at the ethical or quality end of the market and therefore the advice that those clients get is often very poor. I have often been left sweeping up the mess left by such individuals and it breaks my heart because it is very avoidable.

The good news for you is that you are reading this blog and can therefore be armed with the ways to avoid falling into this trap.

The first one is very simple, never ever ever appoint someone who approaches you “with a client” to represent you. If you make it very clear to them on their first contact you will never appoint them or pay them any fees you will be amazed how many disappear.

The second way and which is my preferred route is to build a relationship with a reputable and experienced boutique or other advisory firm. Most reasonable firms will not charge you for “building a relationship” and will deal with an approach from another advisory firm for free in the first instance. Again the disreputable ones will disappear as soon as they see that another firm is closer to you and that they are unlikely to get a fee.

In both of these cases the genuine approach from a credible firm will not be phased in the slightest by the fact that you will not pay them (as that would be a conflict with their client anyway) and will be glad to see another credible advisor on the other side as it would make any potential deal far smoother.

If you have been approached by an acquisitive company directly then again your need to consider a couple of things. Acquisitive companies send out two types of letters. The first is an untargeted sector sweep in which they will write to almost anyone in a sector code and when you call back they will consider if you are a business they want to buy. The second is a more considered approach where they have researched specific targets and approached a shortlist who they specifically want to buy having looked at their strategic goals and decided that your business fits these.

Although the second is clearly preferable, that is not to rule out the first as you may well still fit their strategic plan and still get a strategic (high) offer, but the likelihood of that is lower.

In both cases you need to consider the following points
  • Has the company made previous acquisitions?
  • What companies has it bought and are they comparable to yours?
  • What deal structures in terms of up front money and earn outs did they employ (would      this type of structure be good for you)?
  • Where does their funding come from for further deals?
  • What level of individual in the company is aware of and has signed off the approach to you?
The easiest way to find the answers to these questions is to phone the company and ask them. On that call you can also find out easily if you were the subject of a targeted or general approach. This is fairly simple, if it was targeted they will immediately know who you are and have some (even if limited details of your company). If not it is likely a more general approach.

Whilst, armed with this list, you could make the call yourself it is also possible to use a credible advisor. Most will not charge for this initial fact finding call and will also not bind you into any relationship for doing it. In fact many, all the firms that I have worked for included, would do that call and a follow up meeting at no cost or obligation. It is sensible for both sides to work on this basis, together you can decide if there is a deal on the table that has legs and if so you can decide whether you want to appoint an advisor at all and also if it will be the advisor who did the first meeting for you.

If you follow these initial steps then you will be able to avoid wasting your time with a time wasting approach and within a short timescale of between a day and a couple of weeks have an idea of whether there is a deal which is worth putting more time into.

The next question you have to answer is whether it is worth, given that you have one credible buyer, it is worth opening the process to more. For the answer to this see my next blog:

Selling my business – I have one offer for my business, should I test the market