HOW TO BUY THAT BUSINESS - What is a savvy former US stock market watchdog like Barbara Thomas doing at the head of a home-baking supply company based in an English town called Irthlingborough? She's doing what many of us only dare dream about - running her own show. She shares her wisdom with Matthew Gwyther.
Barbara Thomas is a soignee New Yorker of 52 with a mystifyingly complex hairdo, an almost scary CV and an unparalleled capacity for networking.
A corporate lawyer by training, she was once the youngest financial regulator on the US Securities and Exchange Commission. She graduated second out of a class of 323 at New York University Law School and went on to jobs in Hong Kong (merchant banking with Samuel Montagu) Europe and America.
She has been a main board director of Rupert Murdoch's News International, sits on the boards of Friends Provident, Allders and Capital Radio in the UK and United Asset Management in the US, and may be one of the best-connected businesswomen around. Hers has been a classic corporate life.
All of which makes Barbara not quite the sort of woman you'd expect to find running a dried fruits and marzipan business in Northamptonshire.
How she came from keeping the likes of Ivan Boesky and Michael Milken in line to flogging currants and processed apricots to Tesco offers some clues to those of us who might like to go for broke. Thomas is a smart and driven woman who always hankered after getting behind the wheel of her own business - especially one that makes food (her father owned a food vending machine business). After her spell with Murdoch she felt the time had come. A self-confessed 'deals junkie', she quit the corporate scene and set out to buy herself that business.
Four years later she finds herself at the helm of Whitworths of Irthlingborough, which is her second and biggest purchase at £43.7 million. Her first deal was to buy a smaller rival, Scotia Haven, for £20 million. Neither company was setting the world on fire. Both were fairly dowdy dried fruit, nut and baking-products processors selling to hard-nosed supermarkets. Her long-term plan now is to get Whitworths out of the home-baking slow lane into the speedier, added-value world of low calorie, nutritional snacks - to take currants and sultanas 'beyond the fruitcake'.
Going out on your own is a dream harboured by many business people. Buying an existing business rather than starting one from scratch has many advantages, the most important being to minimise risk and effort. Much of the hard work involved in start-ups is already done for you. Thomas' experience of stalking Scotia Haven and Whitworths gives a good general picture of the ins and outs of buying a business. Like the path of true love, it does not always run smooth, whether you have £60 million to spend or £600,000.
An overview of the various elements of the process she encountered provides an informative rough guide on how to buy a business.
ENTHUSIASM 'I always wanted to buy a food company,' she says. 'You have to love the products if you are going to sell them. If you don't dream about the products, don't bother.' This is an extreme position. Clearly, going to work with a spring in your step because you are interested and stimulated by what awaits you has great advantages - although one could argue that if you dream about making car exhaust manifolds or being the proud owner of a bin-cleaning franchise then you are either sad or have a mild psychological problem. On the other hand, if the prospect of a business with all its ins and outs fills you with nothing but ennui then it might be as well to look for something else.
INFORMATION Thomas was an outsider. 'The first thing I discovered was that it is very hard to get intelligence and information from outside an industry,' she recalls. 'I'd go along to trade shows in Germany and other countries and quite openly ask, 'Would you like to sell your business?" Perhaps unsurprisingly she was met with mystification and some suspicion.
But knowledge is the key to advancement in management buy-ins. All the movers and shakers in the relevant market need to be identified, databases need scouring, advisers need hiring, your profile needs raising. You need to be able to network widely and efficiently and as that network grows it is necessary to be increasingly selective in administering it, so you are not overwhelmed. Thomas' experience notwithstanding, trade shows are an excellent place to wander and make enquiries. Trade journalists are often knowledgeable and rarely turn down the offer of a drink. Accountancy companies, merchant banks and lawyers sometimes keep lists of companies for sale. Trade associations, lists of top 1,000 companies and business-for-sale bulletins can also yield results.
Patrick Dunne, a director of 3i in charge of worldwide marketing, has experience of hundreds of buy-ins. 'One of the most simple but brilliant tips I ever heard was to track down someone who's recently done a management buy-in of a similar company in your type of area. Just give them a ring and ask straight out, 'Would you mind if I pick your brain?" The range of contacts you make will be extensive, so make sure you keep detailed notes of all your avenues of enquiry - what was said to whom and when.
Thomas' breakthrough came when she was advised by a Charterhouse investment banker to get herself on to the board of a large food company. This would open some doors. Accordingly, she joined the Yorkshire Food group. (And, eventually, bought her first company, Scotia Haven, from them.)
SELECTION 'Getting the company size right was critical for me,' says Thomas. 'I came across ladies selling fine chocolates to Harrods and turning over £600,000 per annum, but I knew I wanted something more substantial.
It can take just as much work to do a small deal as a big deal - and, once you've bought, just as much effort to run a small company as a far larger one. So I felt the results were not worth the effort and set myself a rough minimum turnover of £25 million a year.'
'The best people realise that most of the businesses for sale are rubbish,' says Dunne. 'Don't waste time on sub-critical mass companies or those with no added-value possibilities. Also, do not change too many big things for yourself: don't move sector or to the other end of the country to take on a different-size business.'
FALSE STARTS 'When we looked across Europe, we found that the average management buy-in time between starting to look and installing yourself as MD was about 11 months,' says Dunne. Many individuals are defeated by the difficulty of the task. 'Most people give up on exactly nine months,' he says. 'The head-hunters say you're going to be less employable after a year out. Giving up at this point can be unwise, as it's often the third one in the deal flow that comes off, and that occurs in the final quarter of the year.'
Thomas had one big disappointment early in her search with a manufacturer of white protective hats for the catering and food industry. 'I discovered this business which only turned over about £2 million but I saw some promising ways to grow it,' she recalls. The owner was keen to sell and he was going to invest back as a partner. Thomas outlined how it could expand by moving into the healthcare industry, taking over a competitor and sourcing the product in China - where she still had business contacts.
'All of a sudden, and a long way down the line, the man changed his mind.
'Now you've told me what to do with it, I'm not going to sell because I can do these things myself,' he announced. I felt frustrated, sad, depressed - I should have known better.'
Your ideas are valuable. Keep plans for the future as close to your chest as is reasonably possible.
FINANCE 'You don't go to a poker table with no money in your pocket.
One of the most important parts of the equation is to get a close relationship with your venture capitalists,' says Thomas. 'It helps enormously if they are enthusiastic about your search area as well, because their role can be prescient.'
Thomas' money came from the venture capitalists Murray Johnstone Private Equity. She had a head start because she sits on the board of the parent company in the US. 'Buying companies is like buying a second-hand car,' says Jonathan Diggines, the managing director of Murray Johnstone, which has about £360 million to invest. 'All we do is buy used companies.' Though with companies, unlike cars, as the mileage goes up so can the price, if they have proper servicing.
Diggines saw the possibilities of the sector and particularly Whitworths.
'It was one of those time-honoured brands with which people feel comfortable - trustworthy if a little dozy.'
GETTING THEM TO SELL Not every owner will know he or she wants to sell.
They may need persuading. This can be especially tricky if the company is privately owned, with the added emotional ties of family ownership.
Many potential vendors of halfway-good concerns will have been badgered by potential suitors. You will show credibility if you appear to have an in-depth knowledge of the business when you make your approach. Business proprietors are flattered if you've done your research. Whitworths had been the underbidder for Scotia Haven when Thomas bought it in 1996.
One of the first things she noticed on joining was that business seemed to be falling away. 'From day one at Scotia, we started to lose business,' she remembers. 'Our customers just said, 'Sorry but we're not ordering any more. We're off to Whitworths because they're so cheap. Much cheaper than you are." She went off to see Whitworths, who admitted they had a war chest of £2 million-£3 million to undercut Scotia and blow it out of the water. So she decided to buy Whitworths as well, thus removing an increasingly aggressive competitor and creating a larger company.
'Barbara's great skill is not being lightly denied,' says Diggines. 'She just does not take no for an answer. She is fully aware how tough buying a company can be. Before they would deal with us, Whitworths wanted to be sure we were serious. They wanted to see the whites of our eyes.' Thomas paid no fewer than eight visits to Whitworths owners, Napier Brown, to display the intent behind her corneas. Finally, they agreed to sell, preferring cash to shares. The £38 million for the company itself went up to a gross total of £43.7 million when fees and working capital were added.
DUE DILIGENCE In the old days it was not uncommon for buyers to simply perform a financial accounting exercise on the target before agreeing to buy. Much has changed. 'The numbers will tell you what happened last year but they won't tell you what might happen next year,' says Diggines.
The list now goes beyond the financials to include information on markets, operations, legal, environmental, accounting and people.
Getting to crucial information is not always going to be easy and specialist investigators exist to help in this. It is common for sellers to move heaven and earth to prevent prospective buyers from talking to the company's existing customers. Whitworths was very unenthusiastic about Thomas and her people talking to the supermarket customers. 'We had two really quite nasty surprises with Whitworths,' she says. 'Firstly, the company used to do all of Tesco's snacking, dried vine foods. But the client wanted a certain new kind of packaging for which Whitworths did not wish to buy the machinery, so they were about to lose a whole slew of Tesco business.
Secondly, they'd also been arguing with a customer, again Tesco, about marzipan quality and that business subsequently went off to a Danish company.
We'll get it all back, by the way. No matter how much due diligence you perform, you just cannot know about all these things.' There was one final, almost amusing, surprise for the new team once they were installed. The forecast for the next year had included the assumption of stealing a lot of business from Thomas' Scotia Haven.
The area of due diligence is vast and highly important, and 3i produces a useful document on the subject that includes such unexpected advice as, if buying an Italian company, 'gaining accurate employee counts is important', and, more generally, 'What does the vendor do that will be missed?'
PRICE 'Don't overpay, don't gear things too heavily and make sure the equity structure works for you,' says Diggines. It is easy to say that you must draw a line in the sand and make it clear to all that you will not be dragged beyond it. However, with the current economy buoyant in some specific areas, sticking to a price limit is not always easy, particularly if you become involved in a bidding war.
'Our approach was pretty straight and we did not go in for any bluff or double bluff,' says Thomas. 'We agreed a multiple and the price. We agreed that a multiple of between nine and 11 or 12 of profits was the correct figure and we got 10. (Whitworths had made operating profits of £4.5 million on turnover of £103 million in 1996.) This was up the range for a private company, and we certainly didn't steal it, but I'm convinced it was a good deal.'
IDEAS FOR FUTURE 'Remember that on day one, when you go in as the boss, you'll feel a mixture of exhilaration that you've made it and fatigue with all the effort,' says Dunne. 'This won't be shared by those already in the company, who may well feel apprehensive. The best people always make the best use of Impact Therapy. At the beginning, be careful about the rate and flow of change.'
Two years into her new company, Thomas has revivified its kitchen and its production of new lines. Whitworths has introduced a steady flow of new products in the shift from home-baking to home cooking and into nutritional snacks. Among the latest to emerge are Tellytubbies coated dried fruits and 'proper' American chocolate brownie mix.