Members of The Supper Club announced big exits over the years. PCA Predict was acquired by GB Group for £73.8m and Leyou Technologies bought Splash Damage for £125m. The Office Group sold its majority stake to Blackstone for £500m. Exits like these are life-changing and to make the most of them you need to plan and prepare – commercially, financially, and psychologically.
There are lots of reasons to sell your business. You may have fallen out of love with it, no longer feel you’re the best person to run it or take it to the next level. You might have started the business to solve a problem or deliver a service that no-one else could and you’re looking for a new problem to solve. Maybe you want to sell before you get disrupted, or before the market changes to get the best price. Perhaps you’ve been approached by a buyer, or found the perfect company to acquire you.
Before considering the exit options, think of life without the company credit card and the value of running your business as a cash-cow. Most importantly, focus on running a good business rather than selling it but always consider what might be impacting its capital value and salability. Have a clear plan so that you make the right decisions along the way and avoid storing up problems for the future.
Remember, you may not find someone prepared to pay what you think it’s worth. At the start of the process, write down a number you would be happy to sell for and keep reminding yourself but don’t get fixated. If you lose a client in the process and the price gets chipped, you might not get the deal at all, so prepare yourself psychologically.
- What is your passion and purpose? Ask yourself if it is something you can only get from your business or if you could find it in another venture
- Are you selling because you’re scared of missing the best market conditions? Invest in the foundations and ‘fix the roof while the sun is shining’
- What is your magic number and what do you want or need from life? Work backwards from the amount of money you need to sustain the lifestyle you want
Just as there are different reasons to sell, there are different ways to exit. Instead of selling the whole business you could sell part of it to de-risk or take some money out. You could offer to leave some shares in the new company, which not only gives your buyer confidence in its future but you could also benefit at the second exit.
To give yourself the most options, you need to prepare by building a strong senior management team, incentivizing them to deliver on agreed growth objectives, and stay on after an exit.
Here are some options to consider, with tips and observations from members of The Supper Club:
Management Buy Out (MBO)
It can be hugely rewarding to see your staff take over the business but you are likely to get a lower price because they know what it’s worth and you won’t have the competitive tension from the market. Conversely, managers might pay a premium to keep it off the market as they know what it could be worth. You could have a shorter earn out without the need for a drawn out due diligence process.
Tip: Consider a VIMBO (Vendor Induced MBO): You sell to management, take a small amount out but leave a larger sum in that they pay out over a period of time. This makes it easier to buy but you're leaving risk in the business.
While a competitor may want to increase market share, be prepared to share confidential information knowing that the sale could fall through. Look outside of your main competitors for strategic buyers who will pay a premium for your business to gain access to a market or intellectual property (IP). However, this type of buyer is likely to make big changes to the team to reduce costs and increase efficiency.
Warning: NDAs cannot be relied on completely but they are worth having; without them you have no protection against the misappropriation of your trade secrets. Make sure your IP is properly tied down with Patents and Copyright
Founders can retain majority control with a minority stake from private equity (PE). It’s important to understand the motivations of PE to get the most out of it. They will generally want to exit within 3-5 years with three times their investment, so check their aspirations to see if they’re aligned with yours. They will put someone on your board to help protect their investment, so make sure you have a say over who it is. Before engaging with PE, do vendor due diligence so you will look squeaky clean when they do theirs. When choosing PE, organise a beauty parade, research the reputation of the fund, check how they have treated founders, and shortlist based on people within the funds that you trust.
Here are some more tips from members:
- Check to see how much is left in the fund if you are growing fast and likely to need follow on capital
- While PE is generally more tolerant if things don’t go well, they still expect honesty and regular communication; covenants and performance against agreed KPIs will flag any issues
- There are more options for taking money out of the business with PE, and some tax advantages so seek advice
Initial Public Offering (IPO)
You can still be a majority shareholder with a lower stake (i.e. 25%) and a larger group of stakeholders with IPO. A higher valuation is one perceived benefit of IPO over PE; but public scrutiny can be damaging and increase the impact of an industry or economic downturn. It can also tie you up in investor relations and your management team in compliance. The public markets are less forgiving than PE of a drop in profits, due to investment in a ‘pivot’ or new area of growth, so regular communication and updates is paramount to maintain confidence. On the plus side, it provides liquidity for investors and management and raises the profile of the business. Floating means you get less out at the point of selling, but with added liquidity there could be a greater upside when you exit. Here are some tips from members:
Be prepared to be more of a public figure to influence your share price. It can be volatile, as the share price can be effected by perception and market trends. You need to have consistency in forecasting and a strong executive board
If you don’t already have good VCT or EIS backing, then you will need a strong story and board for the public market; the model must be simple and understandable to appeal
If you take money out on an IPO, you are locked in for two years, but if business is going to plan there is flexibility
Having considered all of these elements, you will be in a much stronger position to prepare yourself and your business for an exit.
Member insight: My Exit Journey
Graham Hobson, Founder, Photobox
I started Photobox 18 years ago from nothing. Today we are a group of four main brands operating across Europe, and we’re PE owned. Our last published finances had £300m turnover and we have around 1,400 employees, which gives you a sense of scale. The business is all about personalisation: Moonpig is around greetings cards, flowers, etc, Photobox is more about photos, creating memories – the customer gets something unique out of it.
I always felt more comfortable in the start-up business. As the company matured, we moved into new markets, we expanded across all dimensions: hiring lots more people, investing millions into new platforms, process, much more active management of culture and values.
I really enjoyed learning about those things, but felt that my comfort zone was something a bit smaller. So, from 2007 onwards I was thinking about leaving. For me it would have come a bit sooner, but we were effectively for sale from 2010 to 2016, trying to find an exit for our investors who had been in for a very long time.
Part of the reason I was still there until recently was that I wanted to see that process through, and I felt I had a lot to contribute. But I was actively removing myself from very visible roles. I was CEO, then I was CTO for 8 years, then I started running some of the smaller brands. I became more like a consultant within the business, dealing with problems, and dealing with the exit process.
I knew I would eventually leave, and I didn’t want to leave a big wake. We got to that point in the last few months, with a great leadership team, investors bedded in, and it was a safe time to me to leave. There was lots of operational stuff and working out how to communicate timelines internally to the right people at the right time. It’s about leaving without hurting yourself or the company, which is tricky. That’s why I’m still an investor. I want to be able to walk into the building in 3 months’ time without it being weird.
Visible to invisible
You get a disproportionate amount of attention as the founder. Even when you’re not running everything, people look to you; you’re a talisman. I used to do the open days for new joiners, for example, so I was always very visible around the business. So that requires careful management when you’re leaving.
If you’re keen to join the Club and connect and learn from members like Graham apply here.