Sell it off - buy it back

Some entrepreneurs sell their company, watch it decline and buy it back, usually at a knockdown price - but it's not always about the money, says Dominic Prince.

by
Last Updated: 31 Aug 2010

Richard Branson did it when he floated Virgin in the 1980s and then took it private again soon after. Charlie Smallbone did it when he sold Smallbone of Devizes, then bought it back 15 years later. Jeremy Hacket, founder of Hackets - clothes shop of choice for City boys - has done it.

Estate agency Chestertons has been bought and sold and bought again. Ray Kelvin at fashion store Ted Baker did it. Tim Waterstone has longed to do it with his eponymous book chain. Stelios may yet do it if his buy-back of easyJet materialises.

Selling off, then buying back, your own business can mean big money.

Time it right and you could make a fortune twice. But not all entrepreneurs do it for the cash. Some can't bear to stand idly by when they see what a mess the new management is making of it; others are invited back when the new owners realise they've taken on more than they can handle.

But whatever the reason, it's undeniable that many entrepreneurs make a lot of money out of selling their business at its peak and then buying it back at a knockdown price several years later. It happens more often than one might imagine because of the ready supply of rich and bored businesspeople eager to snap up a sexy brand such as Brasserie St Quentin or shirtmaker Thomas Pink.

It can seem a golden opportunity, yet when the company is bought and the original founder has walked off several million pounds the richer, the new owner may regret the purchase. Perhaps they don't really understand how the company works, or they're not prepared to spend the time on it to guarantee profitability. It's an obvious solution to get the founder back in to pull the business into shape. He or she will know what makes it tick.

Many people are reluctant to talk about selling then buying back, thinking perhaps that they will appear as rascals or card sharps. But do they?

Surely they are just opportunists with an entrepreneurial flair who should be celebrated - after all, they created a great business, sold it and then somebody else messed it up.

Professor John Kay, author of The Truth About Markets and a former director of the Halifax, has an interesting view on the 'sell it off, buy it back' phenomenon. 'It is yet another version of the general failure of acquisitions.

It is what I call "the winners curse" - auctions and acquisitions are won by the people who are the most absurdly optimistic about the value of the things they are buying. In most of these cases, the acquisitions are of companies whose products the chairman or his wife would like to own or use,' says Kay.

He has a point. Upmarket kitchen manufacturer Smallbone of Devizes was bought by industrial conglomerate Williams Holdings in what was a hugely optimistic valuation for a company producing only 800 bespoke kitchens a year. Williams paid £36 million in a deal driven by two of its directors. Charlie Smallbone bought the company back for less than £10 million in 2003 (see box, p61).

Another such example of the heart ruling the head is LVMH, the French luxury goods manufacturer, which bought shirtmaker Thomas Pink in 2000.

According to one close to the deal: 'It was buying anything that looked vaguely attractive as a trophy asset, so it bought this very snazzy Jermyn Street shirtmaker with around 15 shops.'

Pink had been started in the early 1980s by three Irish brothers - Peter, John and James Mullen. They expanded the business and created a terrific brand name before LVMH snapped it up for a rumoured £50 million. The brothers received two-thirds of the purchase price upfront, and the hope was that LVMH would invest and expand the business so that the Mullens would get that much again at the end of two years. Sadly, world events, not least 9/11, conspired against them and the troika walked off in 2002 with the balance - but no accelerated dividend.

Perceived wisdom says that the business has gone downhill since the Mullens gave up control. Although still well run, it has lost that small-town feel. Now and again, an investment banker or equity house has mooted the idea of making an offer that LVMH could not refuse. The Mullens aren't saying anything, but it would be no surprise if one or all of them became involved in the business again. After all, if you're an investor, who better to get to look after your money than the entrepreneur who started the business in the first place?

Yet the new owners do not always need to go down on one knee to ask the original company founder back; sometimes, the founder needs no persuasion.

This was true of Donald Storrie, founder of the Donald Storrie Estate Agency in Hamilton, Scotland. A former policeman and sales director, Storrie set up the business with his wife in 1973. He has since managed the unusual feat of selling it twice, once to a large national company and then again to a smaller regional player.

As vice-president of the National Association of Estate Agents, Storrie was among the first to see the government's draft Building Societies Bill, which enabled building societies to diversify into areas such as estate agency. 'The words jumped off the page at me,' he says.

'I thought the natural thing for them to do would be to buy up estate agents, and that they would buy the biggest in each area.'

With this in mind, Storrie took out a £250,000 bank loan and built up his business into a big concern. By 1986 he had 30 offices, and he was duly approached by Nationwide Building Society. He agreed to sell for £15 million, of which £9 million was his profit.

Storrie became CEO of Nationwide's estate agency business for the UK.

Then in 1989 Nationwide merged with Anglia and the recession started to bite. 'That was really the death knell of it,' says Storrie. 'Anglia wasn't as committed to building up the estate agency side, and with the recession I could see we were going to be in for a very tough time.'

He exercised a break clause in his Nationwide contract that enabled him to walk away. In return for not taking his salary for the remainder of his contract, he gained the right to retain the Donald Storrie Estate Agency name. He also regained the use of his original Hamilton office, which had been rented out to Nationwide. The Storries were back in business.

'I was initially quite comfortable to be back in the same business again,' says Storrie. 'But it didn't have the same buzz the second time around. It's better, if you do sell out, to find yourself something new to do.'

In 1999, Clyde Property asked to buy Storrie's business. 'I was delighted to sell,' says Storrie. 'I'd had enough of it.' He won't disclose how much he sold for, just that he made a profit that he was happy with. Mostly, he was glad just to get out.

Often it's the acquisitive investor who makes the first move. Back to Professor Kay. As if to prove his point about the vanity of the boss nearly always driving the deal, he says: 'I remember some years ago discovering that all the TV corporate advertisements were broadcast in the south-east region. They were aimed at the directors' wives and designed to tell them what great, hardworking husbands they had.'

So have acquisitive companies missed a trick? Professor Kay thinks so.

'The converse is that unfashionable sectors can be very good investments. This is why condom manufacturers and companies that produce tampons are so profitable, because no-one wants to acquire them. Imagine the dinner-party conversation when a director of a listed company pipes up that he's just bought a fantastic condom company. It doesn't quite have the same ring to it as the director who says: "I've just bought Smallbone, the bespoke kitchen maker".'

There is another problem, best demonstrated by the acquisition of Ross Perot's EDS computer company by General Motors in 1985. Through the takeover, Perot became GM's largest shareholder. From the start, he'd berate the board and tell them they had no idea how to run his company and that they were a bunch of idiots. GM became so exasperated by Perot that it bought his shares back and ultimately disposed of EDS.

'What it tells us and what is abundantly clear,' says Kay, 'is that entrepreneurs and bureaucracies do not get on at all well. Big companies do not know how to run small ones.'

But having sold the company and done rather well out of it, the biggest kick of all for a founder is buying it back at a fraction of the cost.

Without the constraints imposed by the City and interfering shareholders - who nearly always know better - the lone entrepreneur will bounce back.

They have the money from the first sale, now wisely invested.

Storrie agrees that entrepreneurs really make their money when they sell their company on. 'The fact that you might sell it at the end and make money is a real bonus. It would be wrong of me to say that money wasn't a major factor in it.' But it's not all about the money ... 'When you build a business, you get a buzz out of it and that's why you do it. The real business is building a thing and seeing it growing and being able to take pride in it,' he adds.

In most cases, the lone maverick with the million-dollar idea leaves the company immediately or soon after the sale; some (like Perot) stay on as a director. But all watch as the baby they created is gobbled up by Industry Plc. Then, after a protracted spell during which things become increasingly difficult, they rush in from the wings, buy the company back for a lot less than they sold it for and start all over again. And hats off to them.

Best of the lot has to be 87-year-old billionaire Kirk Kerkorian, who has sold the movie studio MGM no fewer than three times, making a larger profit each time. Having first bought it for $84 million, he has since sold it to Ted Turner, bought it back, then sold it to Pathe, and in 1996 bought it again, for $1.3 billion. It has just been sold to Sony for $5 billion, netting Kerkorian an estimated $2.1 billion. Now there's an entrepreneur to emulate.

DID I REALLY WANT IT ALL BACK AGAIN? Caraline Brown

Brighton-based entrepreneur Caraline Brown describes the short-lived days of Britain's dot.com boom as 'the most exciting time of my life'.

The former guitarist in the Cool to Snog band says: 'It was like punk rock all over again. It was absolutely brilliant.' Brown was well placed to enjoy the boom. She founded tech PR agency Midnight Communications in 1995, and by 1999 her company was considered a veteran in the UK's relatively new technology industry.

Yet in 2001, Brown sold Midnight to the AIM-listed BV Group, a marketing specialist, for £3.5 million. Just over three years later, she bought it back for £325,000. To most entrepreneurs, this would be a triumph, but Brown was ambivalent. 'It was tough because, having sold it and mentally walked away, I was faced with a difficult decision: did I really want to have it all back again?'

Brown had been through a lot with the company she'd founded on a £2,000 overdraft. The early years were hard and at one point, having lost a key member of staff and had another client go bust owing Midnight £10,000, Brown considered giving up. But then the internet took off and Midnight flourished. By 1999, it had 30 staff and an annual turnover of £700,000.

So why did she sell? 'If I'm honest, I think at the time I was exhausted,' says Brown, who was dashing between Brighton and London, working weekends and looking after a young daughter. 'I also did myself a disservice because I didn't think I was capable of taking the business to the next level.'

She admits that selling the company was an emotional time. 'I felt a sense of loss,' she says. 'I've never been driven by money, ever. I had a sense of inevitability. You build up a business and you exit - that's what people do.'

But having sold the company, Brown couldn't leave. The deal tied her in as Midnight's CEO for three and a half years, with the money from the sale coming to her in chunks. But then the dot.com boom imploded and BV collapsed before it could pay out all Brown's money. As Midnight was the only profitable part of the group, BV asked Brown to become group CEO.

She agreed, although she believed that Midnight's reduced profits would not sustain the rest of the company.

The following months proved her right. 'We just couldn't turn it round,' she says. Brown asked to buy Midnight back. BV prevaricated, but eventually relinquished it for £325,000. As it still owed her a large chunk of the original sale, she had to remortgage her house, take out another bank loan and raise investment from Brighton's movers and shakers.

Ultimately, Brown felt she had no choice but to buy Midnight back. 'It was out of loyalty to the staff and the clients,' she says. 'If I had said "no, take this chalice away", the staff would have been on the streets and it would have been a very dishonourable thing to do.'

She is now glad she bought Midnight back. 'Just recently I've been getting a lot more hands-on again. I do love it.' But part of her would perhaps like to have moved on by now. 'My dream is to sell the company to the staff,' she says.

I KNEW SOMEBODY WOULD SELL IT BACK - Charlie Smallbone

Bearded, with an open-neck shirt and a diffident manner, Charlie Smallbone could quite easily have been a hippie. But Smallbone is the Richard Branson of bespoke kitchens.

He started the business, Smallbone of Devizes, in 1976, and between 1979 and '81 'hopelessly overtraded' until bringing in an investor called John Dibben, who had made a fortune in the DIY market in the West Country.

In 1986 the company was floated on the Unlisted Securities Market - the precursor to AIM - and in 1987 it got a full listing, with Smallbone himself still in charge. Although selling only about 800 bespoke kitchens annually, it was making £4 million a year, and Smallbone and his investors were doing very nicely indeed.

The following year, he had an approach from Nigel Rudd, then the boss of industrial conglomerate Williams Holdings. 'It was extraordinary,' recalls Smallbone. 'Rudd said: "We've had a board meeting and we have all agreed that we are going to buy your company".'

Rudd and finance director Roger Carr were particularly keen on the acquisition.

Since it was a quoted company, there was little that Charlie Smallbone could do, apart from take the money, run and set up another business.

Which is what he did.

Williams acquired the company for £36 million amid many promises for the future. With his boots full, Smallbone went off to the US and started a flooring company called Paris Ceramics, leaving Williams to get on with running Smallbone - not very well, as it happens.

In fact, Williams and the kitchen company never quite gelled and in 1996 Smallbone was sold to the management, which in turn sold it a year later to Gower, a company that was engaged in the mass production of kitchens (with the backing of equity investors). For an essentially artisanal business, this was not a match made in heaven.

Meanwhile, Smallbone's US business was doing well, but he was watching things on the European side of the pond and hankering after his old company. Then, in 2002, a friend was in a meeting with Bridgepoint, the investment trust that backed Gower. 'They said to him: "Do you know anyone who wants to buy a high-end kitchen company", so I just went straight in to see Gower,' recalls Smallbone.

But the courtship was long and arduous, and it took more than a year before the founder was able to buy his company back. What he had sold for £36 million, he was able to re-acquire for 'less than £10 million', he says. In 15 years, the company had lost more than £25 million in value.

So what had gone wrong? According to Smallbone, there had been chronic underinvestment, showrooms had been closed and the turnover was down to £7 million. 'It was most odd the way that Williams managed it, but I always had the feeling that somebody would sell it back to me.'

Now that they have, Smallbone has just sold it all over again - back to the stock market. Unconstrained, the business is thriving again and this time Smallbone will retain a majority stake.

MY REGRET WAS SELLING IT IN THE FIRST PLACE - Hugh O'Neil

From the age of 22, when he left the Irish Guards, Hugh O'Neil wanted to make a career in the restaurant trade. But that ambition took 18 years to come to fruition. 'I just never had the bottle to start, I suppose,' he says ruefully.

Following an eclectic career that included stints in investment banking, the textile industry and as a journalist on the Financial Times, he finally satisfied his yearning after meeting chef Pierre Pochet.

'We went into business in 1980 with a huge bank loan and started a restaurant in Knightsbridge, in the style of a French brasserie, pretty much a first for London at the time,' says O'Neil. It was named Brasserie St Quentin, after the late food and travel writer Quentin Crewe, a cousin and great friend of O'Neil's.

Brasserie St Quentin was not only fashionable, it was successful too.

But it took time for that to happen. 'When we started, we were full for breakfast, lunch and dinner; we had 10 chefs in the kitchen working flat out, but we were losing money,' recalls O'Neil.

By dint of hard work, the business started making money and O'Neil bought out partner Pochet. He expanded until he had three restaurants and a patisserie; staff were given shares and the business attracted other investors, including Margaret Thatcher's former arts minister Lord Gowrie. The business was rolling and O'Neil and his shareholders were making serious money.

Flush with success by 1989, he sold out to the Savoy Group, whose managing director Giles Shepherd had been an old schoolfriend at Eton. The shareholders received £2 million and O'Neil joined the board of Savoy Restaurants.

'I always resented selling,' he says. 'I was a fool to have sold it in the first place, but I lived next door to the original brasserie and I kept an eye on it - and watched it going down and down.'

The chronic lack of investment in the business was not helped by the fact that the Savoy Group was changing hands amid a great deal of uncertainty.

Forte tried to wrest control, then Granada took over, and ultimately the company was sold to US investment group Blackstone. One outlet was closed and two restaurants were subsequently sold to the quoted Chez Gerard Group, where they fell further into the doldrums. O'Neil pounced.

The former chef at the Savoy, Anton Edelman, was a friend of O'Neil's.

After the Savoy had been sold and resold, both were itching to get back into the restaurant business. 'Two years ago I said to Anton: "Why don't we have a go?" We got some posh shareholders to put some money in (including the Marquess of Salisbury, another former Cabinet minister under John Major) and off we went,' says O'Neil.

They paid £350,000 for a business that had been denied investment and care for years. Now called Brasserie St Quentin 2002, it is not yet profitable but soon will be if O'Neil gets his way. 'We are breaking even at the moment, but we have a lot of new ideas tossing around that will come to fruition shortly. Of course, it will take time, but I just love this business and my one regret was selling it in the first place, but we will get it right.'

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Upcoming Events

Subscribe

Get your essential reading delivered. Subscribe to Management Today