Think Tank: the vital importance of having a good exit plan

The for-sale signs could soon be going up on a raft of lean and mean mid-sized companies around the UK.

That’s the view, at least, of corporate finance experts. A backlog has built up since 2008, and with large companies and private equity firms sitting on piles of cash that they now want to deploy, Christmas could come early for many founders nearing retirement.
Young guns on a stratospheric sales trajectory should be able to command punchy prices, despite the turmoil in the markets caused by the eurozone crisis.

Attention in the City has focused on the lack of initial public offerings and the limited number of big M&A deals. Yet look outside of the capital and corporate finance activity this year has been solid ? or “more than OK” as KPMG’s vice chairman, Malcolm Edge, happily reports.
It makes the publication of Guy Rigby’s book, From Vision to Exit, usefully timed. Mr Rigby is that valuable combination of numbers man and business owner and he now leads the entrepreneurial services group at accountants Smith & Williamson. His book sets out a structure to a process that will be unfamiliar to most company owners. It is not every day that you sell a business ? and when things are unfamiliar expensive mistakes can be made.
On selling, Rigby makes this pertinent observation. “Given the Herculean effort that most people put into building their businesses, it’s amazing how many of them fail to plan their exit. Serendipity often rules, with many accepting apparently flattering or friendly offers without bothering to market their businesses.”

Spending time searching for and getting to know those “non-obvious buyers” is crucial, he says, as is proper preparation. This means being on top of your numbers, being transparent and having the capacity to maintain trading while the sale process is under way.

Too many owners see trading decline when they come to sell as they take their eye off the ball, says Rigby.

He cites Jonathan Hick from Directorbank, which supplies non-exec directors: “I’ve learned that you should always plan for exit even if you don’t want to exit tomorrow, or even if you don’t intend to sell up at all.”

Being transparent is about pulling together all “the leases, asset registers, insurances, staff and customer contracts, accounts and business plans” in one place ? ideally a virtual data room that potential buyers can access.

It is much better to hold back good news to strengthen your negotiating hand than for a buyer to push down the price because they discover something late on they did
not expect.

These tips are applicable to businesses in any sector. Jason Purcell, chief executive of investment bank FirstCapital, hosted a seminar at Merrill Lynch in London last week for technology firms keen to plan for a sale. It’s a hot sector at the moment, with the 25 largest global technology companies sitting on $600bn (£373bn) in cash.

Key discussion points included identifying trade buyers early, making space from the day to day to run the sale and being prepared. “Being prepared is about running your company on the right footing anyway,” Purcell says. “You would be amazed how many companies don’t have half their contracts properly signed.”

The last thing the economy needs is for the value embedded in companies to be lost through poor marketing, especially if they are acquired on the cheap by inward investors.
It is a real issue. As Jonathan Boyers, head of KPMG’s corporate finance team covering the north of England, says: “I think there is a backlog of people who have wanted to sell their businesses. Some have wanted to sell for five years. If they were approaching 65, they are nearing 70 now. If it was ill health [the reason for selling] then they are nearly infirm now.”
For those still able to get about, Boyers says there has been a distinct change in the way these companies are marketing themselves. Just as online dating has revolutionised courtship, so has the financial crisis affected company sales. Businesses are courting their ideal buyers for longer, says Boyers.

“Don’t rush it,” he advises. “For companies who are looking to sell in the next year, the name of the game is to identify the most likely trade buyers and understand why they would want to buy the business. Develop a strategy to contact them and energetically groom them.”

Successfully passing on businesses ? whether publicly traded or private ? to the next generation of owner-managers and entrepreneurs is vital. Yet there has also been a surge in first-time founders of double-digit turnover companies selling out too early.

Elite Telecom’s Matt Newing told me recently that three of the four businesses he has bought this year were sales driven in good part by a desire to bank the cash now because of the uncertain trading environment. Some wanted to take advantage while they could of the £10m lifetime capital gains tax allowance, which attracts a reduced 10pc rate of tax.
Matthew Riley, chief executive of Nelson-based Daisy Communications, the fast-growing Aim-listed telecoms services firm, says he knows of numerous examples of peers who have sold to retire early in comfort, living their lives around the golf course.

Yet, sitting on a train returning from a conference, one founder of a well known food brand spoke of the sense of loss he felt after selling up to private equity. This once energetic and high-achieving entrepreneur was actually feeling a little low.

The corporate financiers don’t tell you about that part of the deal. The theory is that anyone that can set up a business can become a serial entrepreneur. But the reality is that many only have one special business idea in them.

Yes, there is stuff about “debtor days” and “defining business needs” in Ribgy’s book, but nothing that I could find on why not to sell. As Riley says, when he was first approached with an offer to sell, he had no idea how to value his business and felt pretty isolated.
He knew he should consider the offer because of the strain he had put on his family’s finances. But he stood back and thought: “If you think my company is worth £200m then it must have the potential to be worth a lot more than that. So why don’t I find out?”