There's no guarantee your success story will elicit an offer you can't refuse, as it did for the owners of Exhilaration. You need to groom your start-up for sale, and pick your moment. Emma De Vita reports.
It's not easy, selling a business. Letting go of a company you've nurtured since its birth can be an emotional wrench - like waving goodbye to your child on their first day of school. But what is it really like to sell the business you founded, own and manage?
Husband-and-wife team Nicky and Tim Homer sold their experiences business Exhilaration in eight weeks flat, after receiving a whirlwind offer from Lastminute.com in September 2002. Exhilarating indeed. 'It was unbelievably fast', explains Nicky. 'We were surprised, but not altogether shocked. It made us think: why us and why now?' And was the money enough?
The Homers had set up Exhilaration in 1998. Nicky was sales manager at Betz Dearborn and Tim worked at UHU Glue as national account manager. Both were ex-British team skydivers. 'Exhilaration was really a marriage of what we knew from our hobby and what we knew from business,' explains Nicky.
They started by offering experience vouchers to consumers for motor racing, balloon flights and skydiving. Two years later, they were running to keep up with demand from companies looking for new ways to incentivise staff. Clients now number more than 100 and include BT and the London Stock Exchange.
The Homers spent five years growing the business, with the aim of breaking even by 2002 (which they achieved on a turnover of pounds 1.2 million). No thought was ever given to selling the company. 'That wasn't part of the plan. We weren't grooming the business for sale', says Nicky. So, when Lastminute expressed a serious interest in acquiring Exhilaration, the Homers were taken aback. 'We had been a Lastminute.com supplier for two and a half years, and were seeing their figures and their growth in the sector, and realised it was key for them,' says Nicky.
'It's often the case that an entrepreneurial business is approached unexpectedly,' says David Wilkinson, partner at Ernst & Young's entrepreneurial service. 'Sometimes this causes a shock, because suddenly there are big numbers in play. Owners don't realise what they have, and often think it's too good to be true.'
It was a feeling that Peter Collin experienced when book publisher Bloomsbury offered him about pounds 1 million for his dictionary business over Christmas lunch in 2001. 'It was a complete surprise. If we hadn't received the offer, we would have certainly gone on, built up the company still further, and then sold,' he says.
Collin and his son Simon decided to accept for a combination of reasons: the timing was good, the money was right, and it was getting hard to continue growing the business after 17 years with just two of them at the helm. This last problem was a frustration Nicky Homer shared. 'You get to a point where the business is growing and you can see there's massive potential, but you haven't got enough hours in the day or people to allow you to make that next move,' she says. Accepting Lastminute's offer has given Exhilaration the financial and infrastructural resources needed to support its growth. Expansion plans have now been brought forward by two years. 'It was a major reason for accepting,' admits Nicky.
But let's not be coy here. 'The most obvious and immediate reason for an entrepreneur to sell is to make money,' says Wilkinson. The Homers were offered an initial pounds 1 million in Lastminute shares, with a further pounds 2 million after three years if the business performs as expected. Lastminute was keen to get things going on a serious and honest footing quickly in order to strengthen its lifestyle division in time for the crucial Christmas period. Its offer was a good one.
'But the danger is to assume that just because the offer is big, that it's the best number you'll get,' warns Wilkinson. 'And even if you get an offer that you are happy with, don't assume that it's what you'll end up with.' Once the vendor has agreed an initial sum, the purchaser will want to carry out due diligence, for two reasons. First, to make sure they know what they are getting, and second, to find issues that can be used to reduce the price.
Both Wilkinson and Graham Johnson, a director at corporate finance specialist Moore Stephens, say the best way to get the price you want is to prepare your company for sale from the start. Insists Johnson: 'It's never too early to start grooming your business.' The purchaser will calculate the valuation of a business as a multiple of its profits or expected profits, so your accounts need to be transparent, your expenses in order, and budgeting accurate.
You need to demonstrate growth history and provide sound evidence for future expansion. Says Wilkinson: 'The more potential you can show going forward, the higher the price they will pay.'
What else will a buyer be looking for? 'A good-quality management team, capable of continuing the growth of the business,' says Johnson. 'It's important to have breadth of management so if an owner departed, there would be someone who could take over.'
If you don't, the purchaser will want to tie you into the business after acquisition - typically through an earn-out clause (a mechanism that links the price paid to the vendor to the future performance of the business sold) - to ensure it lives up to expectations. If you are locked in this way, Johnson advises that you link the earn-out to a trigger factor that you can control, such as gross profit. This will minimise risk and help you deliver.
The Homers are contracted to stay with Lastminute till March 2005, charged with running its lifestyle division. Nicky admits to a good working relationship with her new owner: both companies are young and forward-thinking. It's a good strategic fit.
'I don't think there should be any great post-acquisition surprises,' says Nicky. 'You need to have an open conversation about the plans the buyer has before the deal is done. Make sure their vision is livable with. It must be soul-destroying to sell a business and then find that your staff are sacked and your plans for the company suddenly shelved.'
Tim agrees: 'It's not just about selling your business, but selling your life. Exhilaration is almost like a son to me. My advice is to study the purchasing company, spend some time in their offices to get to know their culture.'
If you're actively marketing your business for sale rather than responding to a takeover offer, you'll need to show profitability (or the ability to become profitable), and demonstrate how your product or service will complement those of a potential buyer. Corpor- ates make an acquisition to gain new customers, expand into new markets, or to buy in people with the skills or knowledge they lack. The Homers had a good understanding of Lastminute's motives: it wanted to expand its lifestyle division, and buying Exhilaration would enable it to do this quickly.
Collin could see the attraction his business had for Bloomsbury. 'Bloomsbury's policy is to develop its reference publishing. It already have several big dictionaries of its own but didn't have the specialised dictionaries,' he explains, 'and we were the only privately owned dictionary company in England.
Once you've identified a purchaser's motives and are happy with them, can see yourself working with the buyer and like the offer, get professional advice - from a solicitor, an accountant or a corporate finance specialist. 'Have good people around you that you trust,' says Nicky. 'We were lucky to have a solicitor with whom we could sound anything off.'
An adviser will be able to guide you through the process, from valuation, through due diligence to creating a sales memorandum. If you are actively marketing your business for sale, Johnson recommends putting together an information memorandum, which gives an overview of your key management, products and strategy. Once completed, start approaching companies most likely to be interested in your business. Think of competitors, VCs, strategic buyers looking to get into your sector, even management themselves. 'It's better to approach a few companies rather than everybody, as that is not necessarily the most productive approach and it reduces confidentiality,' explains Johnson.
Timing is key. 'There are only a limited number of opportunities in the life of a business for selling,' warns Wilkinson. 'I know businesses where they haven't taken the opportunity and then have gone into decline.'
Collin took his opportunity. 'There were rumours that dictionary sales were tailing off, and our sales in Argentina collapsed overnight. We thought it best to get out when the going was good.'
Once the deal is signed, all that's left is to celebrate. Collin and his son threw their towels in and headed off to a wine bar for champagne. The Homers were more cautious: 'We'll be waiting until March 2005,' says Tim. Not even a celebratory skydive? 'We've moved on to flying lessons now,' reveals Nicky.
SELLING YOUR BUSINESS AT THE BEST PRICE
- Prepare from day one. The key to getting the best from an unexpected takeover offer is to be ready for it. Grooming is essential.
- Get your accounts in order. And don't forget the paperwork - it should be well organised and accessible, not hidden in the bottom of the filing cabinet.
- Invest in your people. A good-quality management team, poised to take the business forward, is an attractive proposition to an interested buyer.
- Find an adviser you can trust, especially if you've never been through an acquisition process before.
- Research the market to see which companies might be interested in buying your business, and what kinds of acquisitions are being made. Is now a good time to sell?
- Think post-acquisition. Research your buyer thoroughly to ensure that if you are staying with the business, you will be happy to work there.