Posted: January 13, 2016 by Robert Craven
So… the business has been going for a couple of years and it’s all been going quite nicely… sustainable business growth… you’re making tidy profits… you’re taking home a decent whack… but where to next?
The dilemma that many comfortable businesses seem to avoid is that of the exit. What on earth are you going to do next? The business is pretty good but how will you extract the maximum money from your hard-earned enterprise.
Several options appear in a rough order of ease:
The first few options are pretty straightforward.
Pretty straightforward this one – you just take as much as you can out of the business in the form of pay, dividends, and perks irrespective of the performance of the business – not the sensible option and often the option people follow unconsciously… but you can get back a lot of your investment by this method.
This option may come at the end of Option 1… – quite simply, you just close the doors, shut up shop and wait for the liquidator or insolvency practitioner or bankruptcy courts to catch up with you. You leave them to sort out the outstanding debt and sort out the remaining creditors and if there’s anything left (after professional fees) then the shareholders get some money. Not the cleverest option and one that, again, some people do without any clear conscious decision to do so.
The idea behind the ‘friendly sale’ is that this takes place with everyone being happy. Someone nearby, employees (MBO) or friends or family don’t want to see the business disappear and take it over rather than see it sold. This is a great option but not predictable; often these sales do not see the highest valuation for the business because it is not a purely mercenary purchase but on the other hand, the business gets passed on to a friendly face!
Selling the business to the open market requires there being one buyer out there who wants to buy a business like yours. Usually they will be buying in order to get into a new market or access to customers but it may be to acquire you technology, your goodwill or your market share.
Trade sales tend to get you a better price when it is not known that you wish to sell but each deal is different! Ideally you would set your business up to look attractive to the purchaser so you should think carefully and a long time in advance about what a buyer might wish to buy (a management team or ideal client list) and create a business to reflect that.
Your management or another management might wish to buy your business. MBOs are attractive to the existing management because they know the business already, warts and all. A similar set of guidelines applies to selling the business to MBOs, MBIs and the other sensible options below (whether selling the business or looking for funding).
Business angels bring funding (£50,000-£1m?) and their own experience to your business to help you grow it. The stereotypical Business Angel has been there and done it and has some capital to play with. They usually wish to join the board and can give you the experience and the money that you need to take the business to the next stage of growth.
Venture Capital, sometimes referred to as ‘Vulture Capital’, is not for the faint-hearted. Deals normally start at about £1m and the VC looks to see higher than average returns on their investment, say 30+% pa. VCs are professional business growers and only invest in businesses that can generate the returns that they seek.
Going to market is sometimes referred to as IPO (the Initial Public Offering, in effect a prospectus offering shares in a business for sale). In essence there are three markets to consider, in order of ascendancy: Ofex, AIM/NASDAQ and the full Stock Market quotation. In very general terms, Ofex is a smaller, independent market for funding up to £5m, AIM looks at £1m+ and the stock market is for £10m+.
The cost of each option increases with professional fees associated with each option. Look out for these costs – there is an entire industry out there that makes its money out of the business of buying, selling and funding businesses. Due diligence is the least of your potential costs (lawyers, accountants, promotion, PR and so forth) with total fees often in excess of 5% of the amount sought – and don’t forget that each exercise might take a minimum of six months of director(s’) time.
Rather than get money to grow, you can try to grow organically. The problem here is that business growth means that you are haemorrhaging cash and you need something to supply the cash. ‘Buy And Build’ is an excellent fast-track route to growth but needs even more cash to fund it.
Whichever of the sensible options above you wish to take (ie not options one or two) requires a special business – otherwise it will hold no attraction to a potential buyer or funder. Whatever your direction, it seems sensible to run a business that adheres to some core principles.
Fast Growth businesses are different from their counterparts, the life-style businesses. They are more aggressive, more business-like and more systematic and structured in their approach to growth. They buy in competence when they need it and they have ambitious goals and usually achieve them. Fundamental attributes that the fast-growth business must exhibit to be attractive to a buyer or funder should include:
Anyone interested in your business will want to see underlying, repeatable, sustainable profits. Who wouldn’t. You need to be able to demonstrate beyond doubt that your business has, can and will deliver long-term profits. Here we presuppose there is some evidence that the right market conditions will continue to prevail.
As well as the guaranteed profit stream, your business should also be able to demonstrate, conclusively, that you have some reference clients (people that the buyers/funders can speak to) and more importantly some trophy clients (proof that your product works because one/some of the key players in your market place believe in your product or service).
These are fancy business school terms that refer to your core skills, what you are really good at. Back in 1990 Pralahad & Hamel said ‘In the 1990s (managers) will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible – indeed, they’ll have to rethink the concept of the corporation itself.’
More business school fancy terms that refer to uniqueness. The unique skill set that you have (intangible assets) is one part of the equation… another would be Intellectual Property, ideally a protected, defendable IP for something that is in high demand, which gives you a unique position and advantage in the market.
Has your senior team got the right people in place for the next stage of growth or have you still got some left-over fellow-travellers who don’t really deserve their seat in the board room for any other reason than long service (or their family name)? Through the eyes of the buyer/funder, do all your board members still add real value to the business. Can the business continue to flourish without the current owner(s)?
So which is it:
Time for a sharp exit – you need time for your exit strategy to kick-in?
Time for a sharp exit – you need to plan the timing of your exit?
Time for a sharp exit – your exit needs to be swift?
Time for a sharp exit – you need to start thinking about how you are going to exit the business…
The advert runs ‘Time for a swift exit – time for a cool, sharp Harp’! For me, I am going to imagine what it would look like if Carlsberg ran a fast-growth business.