First published in the Financial Times on 30th December 2014.
We have just been through a beauty parade to select an adviser to sell a business
There comes a time when even the best companies have to be sold. It might be because the founder has no successor; it could be because the owner wants to diversify their wealth; it is often because of one of the three Ds: death, divorce, or a dispute between the partners.
In any event, successful private companies tend to change hands sooner or later. Such a big step must be handled well if you are to achieve what the experts call “a good exit”.
Unfortunately, all too often the opposite happens: a rushed disposal, because the founder is ill; or the wrong adviser is appointed, who makes a hash of the process; or the sale never completes, with wasted fees, time and disappointment; or there is an exit where the founder suffers profound seller’s remorse, because he or she did not plan well for their departure. There is much that can go wrong concerning such a life-changing event.
A good exit means the seller receives a fair price, and feels a sense of accomplishment. Owners often want to be sure — as far as they can be — that their key colleagues have been well treated over the sale. And most ex-owners need to find a new purpose in life. For many high-achieving entrepreneurs this latter requirement can be a huge struggle, having spent so many years devoting their heart and soul to an enterprise, only to cash out and leave it behind. With their business gone, their status, income and occupation can evaporate.
But everyone knows that everything ends eventually. Entrepreneurs understand that owning and running a business entails a series of obligations to various stakeholders — staff, customers, suppliers — as well as the expectations of family. More often than not, the children of a founder do not want the responsibility of inheriting a family business. And founders typically dislike keeping all their wealth tied up in a private company that they no longer control and run.
In London there are dozens of boutique financial intermediaries specialising in the sale of private companies for their owners. It must be a lucrative franchise for the busier ones since, like all consulting partnerships, their costs are just the people — and the premises, which need not be expensive.
We have just been through a very rigorous beauty parade to select an adviser to sell a business I partly own. The firm that was ultimately chosen had chemistry with the founder, a strong record of disposing of similar assets and was very hungry to secure the mandate. The fee is essentially contingent on success, and represents about 2 per cent of the estimated consideration. It appears that this is the going rate, although no doubt there are others who would do the job for less.
One of the better books I have read on this subject is the recently published Finish Big, by Bo Burlingham, a writer at Inc magazine. The subtitle — “how great entrepreneurs exit their companies on top” — says it all. The volume is full of sound ideas about which advisers to use, how to find meaning after selling your life’s work, how to balance the various priorities when you sell, who to sell to — and what price to expect.
Many buyers insist on an earn-out arrangement, so the seller is obliged to remain and deliver profits for some years according to a formula legislated in the contract. These types of structures frequently go wrong: there are disputes about interference from the new parent, or misstatement of profits, or the founder simply loses interest if the earn-out targets are missed.
For the buyer, an earn-out model can inhibit full integration of the newly acquired business, thus preventing synergies, and partially defeating the rationale for the deal.
Of course, an exit does not have to involve the sale of the entire concern. It can make sense to sell only a portion of one’s stake, and retain a shareholding in order to participate in any future upside. I have sold too early on at least three occasions, and regret not having insisted on keeping a chunk of shares. Generally, you lose control but it provides liquidity, and sometimes capital for the business and fresh management impetus.
And then there is the option of taking your business public, as we did in May this year with Patisserie Holdings. But that’s another story…