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EXIT STRATEGIES

Are you ready for that leap of faith?

16 on -pa ge t tim he re rig po e se t h rt ll o t

June 2014 | business-reporter.co.uk

Business Reporter · June 2014

an independent report from lyonsdown, distributed with the daily telegraph

Exit strategies

Opening shots René Carayol

FEW YEARS ago I was invited to present a groundbreaking series for the BBC called Mind Of A Millionaire. Our objective was to answer the question: Are entrepreneurs born or made? We started off by redefining the entrepreneur as a self-made millionaire. Out of the 70,000 self-made millionaires we found in the UK back then, 49 per cent were dyslexic and 59 per cent came from deprived or dysfunctional backgrounds. This less-thanprivileged background gave rise to an i nc redible deter m i nat ion a nd a n indefatigable drive for success. We worked closely with a batch of the UK’s most successful entrepreneurs over the fourpart series. Our conclusions were that the different circumstances that many had endured during their formative years gave them some special ingredients that cannot be produced in a classroom or university. When we asked Tim Martin, the outspoken entrepreneur and founder of the successful pub chain, JD Wetherspoon, why he had given the chain that name, he said: “He was my teacher back in New Zealand who was convinced I would never achieve anything in business.”

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Today’s entrepreneurs could benefit from having a Mrs Green behind them If we fast-forward to today’s, in the main, much younger founders of start-up businesses, they still tend to be male but extremely well educated. They tend to be fixated on the Silicon Valley model and are bent on finding the next disruptive technology. Their desired exit is usually to be bought by one of the huge tech players like Facebook or Twitter. For many, that dream never comes to fruition. Those that find an institutional investor soon have demands for lean methodologies, expensive incubators or accelerators and complex standardised term sheets, which are making these start-ups increasingly standardised and commoditised. This shifting of power is starting to imitate the relationship between management and its workforce, rather than the entrepreneurial class they set out to join. It is always an

Follow us on twitter: @biznessreporter emotional rollercoaster ride, and most have not been “wired” to cope with stark issues like not always having the cash necessary to meet the payroll. Investors increasingly are only allowing small draw-downs of cash until they see something tangible, or specific milestones have been hit. These smart-tech whizz kids are, in many respects, new-age workers not entrepreneurs. Attitudes to failure can vary massively by culture. After a couple of failures in Europe, they tend to disappear back into a routine job, away from all the stress, and draw a regular salary. In the US, it has always been very different, where failure is often worn as a badge of courage. Those who do eventually make it through to being acquired by a large and successful existing tech player sometimes realise that they have been acquired much more for the strong management team rather than the clever software they have produced. On the set of Mind Of A Millionaire, I interviewed serial entrepreneur David Gold, now of West Ham United fame. I asked him if he had the chance to take any three figures from history out to dinner, who they would be. As quick as a flash he responded Julius Caesar, Jesus Christ and Mrs Green. Mrs Green was his form teacher at school who had told him on the day that he left, that he would achieve nothing in his career. Adversity makes us resilient, perseverance enables delivery, but experience increasingly counts.

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Business Reporter · June 2014

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Exit strategies

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Companies open to divestment options as IPO markets stutter By Joanne Frearson ALTHOUGH there is a trend towards corporates to favour initial public offerings (IPOs) as an exit strategy, companies are considering all options when it comes to finding a buyer for a business. Jonathan Parry, corporate partner at law firm Ashurst, says: “At the moment people seem to be leaning towards IPOs [but] there is always one eye on the other track. If you are working on an IPO there is always the possibility of a knockout offer coming through on the sale side.” M&As which had been muted recently are starting to make a return. Parry says: “It does seem to be coming back, and we are seeing a lot of transactions that are not in the public domain yet, but show a marked pick-up in M&A. “If you are being prudent and want to get maximised value, you need to make sure you have all options open.” Mike Wright, director at the Centre for Management Buyout Research at Imperial College London, says: “I would expect a shift towards more M&A exits generally. That means secondary buyout exits may decline a little bit. We will probably see an opening up of range of exit options. “Whereas before initially we were focusing on secondary buyouts, then

IPOs and secondary buyouts, now the third leg – corporate M&A – will start to come in more strongly.” Companies are making sure, if they decide to go down the IPO route, that they cover themselves and make sure the work they do on a float can also be used if a sale comes up instead. Parry says: “I think it is also important you use the work that is done on one of the tracks in the context of the other. For example, the legal, financial and business due diligence that is undertaken in an IPO context as well as the draft prospectus can be used on the sale side as well. “Trying to keep a lid on costs and making sure you use as much of the work done on the other track is obviously quite important.” There has been talk by analysts that the buoyant IPO market, which investors have seen over the past few months, might be starting to weaken. Early in the year shares in discount retailer Poundland soared after its IPO debut, while shares in Royal Mail surged after its launch last year. Now there are signs some companies are finding the IPO market difficult. Retailer Fat Face recently pulled off its plan to float, while insurer Saga only managed to sell its shares for its IPO on the lower end of the price range. Wright says: “One of the issues is if it is an IPO then it can take a long

Market strengthens as PE firms sell up PRIVATE equity companies are pursuing exit strategies as they reach target levels for the companies they have acquired. Harry Hampson, head of financial sponsors at JP Morgan, says: “Some of our observations suggest that a number of PE firms have reached their return targets,

sooner than the investment life they had expected. “Private equity firms are currently more focused on exits for companies in their portfolios rather than buying new ones. Prices appear to be relatively high, so it might be difficult to find attractively priced assets, as public equity markets appear to be paying

IPOs, such as that of Royal Mail last year, may be decreasing in popularity as an exit strategy

time to actually get the flotation away. There is the whole process of sorting out the prospectus and the roadshow, that can introduce uncertainty in terms of the pricing that you may get if conditions change.” According to Parry, companies on the IPO track are engaging with potential investors much more early on in the process than previously. He says: “The early look presentation is now a feature of pretty much every

up for growth. We’ve found recently that prices achieved from the public market are at least as good as, if not better, than what the companies might be able to attract from other financial sponsors or from strategic buyers. Hampson, however, expects “the uptick in corporate M&A [to] provide PE firms new opportunities to put money to work if companies seek to refinance acquisitions with the sale of non-core assets, for example.

“Often firms have to make an assessment between how realistic it is to sell 100 per cent of the company to a strategic financial buyer and how that price compares with going public. “How companies exit will be a function of the market environment at that time. We see more IPOs as the chosen route as public equity markets remain strong, though that could change as selling to another PE firm or corporate could become more attractive.”

With thanks to... Publisher bradley scheffer...............................info@lyonsdown.co.uk Editor daniel evans.............................................dan@lyonsdown.co.uk Production Editor dan geary .................d.geary@lyonsdown.co.uk Reporters...........................................dave baxter and Joanne frearson Client managert alexis trinh.......................alexis@lyonsdown.co.uk Project Manager Justin brocklebank.........justin@lyonsdown.co.uk

IPO we work on. This avoids the situation where a company goes a long way down the IPO road, incurs costs and so on, only to find that the investor appetite is not what had been anticipated. “Volatility clearly has a significant impact on any exit strategy. If you look at the VIX index [a measure of market risk], as soon as the average came below the low twenties, the IPO market came back immediately. You

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don’t necessarily need a stock market that is continually rising, you just need stability, as soon as that returned in late 2012, early 2013, the IPO market came back. “It is having some comfort that from the point when you announce your intention to float to a month later when you actually price the deal, that you are not going to be faced with significant volatility or worse, a rapidly falling market.”

Business Reporter · June 2014

Exit strategies

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Planning ahead to get maximum value Don’t miss out on entrepreneur’s relief INDUSTRY VIEW

lanning should start at least a year before an exit in order to get the best tax breaks and maximum value from a deal when a business is sold. Ann-Maree Dunn, tax partner at accounting firm WMT, says: “One of the key tax issues for exit strategies in family businesses is accessing entrepreneur’s relief. “Entrepreneur’s relief is a generous rate of tax for people that sell their businesses. Maximising this means sellers can pay 10 per cent tax on their gains, instead of the standard capital gains tax rate of 28 per cent.” For larger businesses, planning may include making sure several directors are able to benefit from this relief. What planning the business undertakes to get the best tax break in an exit strategy entirely depends on the owners and what they want to sell. Andrew Williamson, corporate finance partner at WMT, says: “The way the exit is structured always varies, depending on circumstances. But there are some generic strategies you have to think about to see whether they are applicable. These include: how the shares are held, how the business is structured,

where the trade is, what buyers are interested in, and what the key assets in the business are.” Dunn explains that many people who own their own company are looking to sell only parts of it. They may have property tied up in the business that they want to keep, or shareholdings that are spread fairly widely across family members. She explains that it is important to get the ownership structure of a business correct, so the assets they want to keep can be held as separate entities outside the sale process. This will ensure they will not impact on the full value for sale. Dunn adds that this process can be lengthy. “The earlier business owners start planning their exit the better,” she says. “Five years ahead of the planned exit is a good benchmark.” The minimum she recommends is 12 to 24 months, which “will prevent business owners falling into bear traps or having problems that could have been fixed if they had time, but are impossible to resolve closer to sale”. If a business does not plan, it risks missing out on tax relief and not getting the best price. It is also important to keep your options open. Buyers can appear unexpectedly before a planned exit date, and often the best deals can be within the

existing management team. Management can also create tax breaks for the company when exiting by offering share option schemes. “Your existing management team knows the business inside and out,” Dunn says. “A lot of people have a strong sense of loyalty to their own team that will help them take the business forward.” According to Williamson, a plan for an exit strategy requires ingenuity, and businesses should “make sure they are working with advisers who look at the situation from every direction to find the right route for both the owner and the business”. So, if you are thinking of your exit strategy, plan early, plan well and be prepared to flex your strategy to make sure you and your business benefit from tax breaks and obtain the maximum value in a sale. 0800 158 5829 www.wmtlllp.com

SME owners must consider what they’ll need to fund ‘life after business’ before heading for the exit INDUSTRY VIEW

he term “exit strategy” has long created images most entrepreneurs will identify with – a lump sum, heading off into the sun and putting their feet up after a hard slog in the rat race. For many SME directors, this leads to a process which involves getting their house in order. However, simply ensuring the books are in a healthy state and legalities have been considered is not enough. What many SME owners fail to consider are their own personal financial needs – what they will need to fund either a lifestyle with existing commitments, or alternatively, what they may need in order to embark on a new venture, or just retire.

For most, it is failing to consider this ahead of time that can result in not achieving the right price for the business. It’s important to remember that it’s not always about keeping hold of the business until it reaches an ideal value. To reach that point, many business owners could work significantly longer than they might otherwise want to. Instead, they should recognise the amount of money they need to enjoy the lifestyle they want, and work specifically to achieve that goal. Owner-managers for the most part are so involved in the day-to-day running of the business that planning ahead isn’t

always at the forefront of their minds. But with an exit strategy it is important they view their business much like an employee will view a pension – ensuring they understand what it is they need from the sale as a means of living when they hand over the keys. This foresight also helps identify where the business is currently at financially, and where it needs to be in the future to achieve this required value. Working with a corporate finance team, business owners can then assess whether the sale value they require is realistic. If the answer to that is no, taking

professional advice on how to build their business through acquisitions or investment will be key to ensuring that, when the time is right, the business will stand a fighting chance of being ripe for sale. During this time of planning, it is also important to take a step back and analyse the strengths and weaknesses of the business in order to be prepared for the negotiation phase. Business owners should put themselves in the mindset of the buyer and look to accentuate the positives, but also identify where there is room for improvement. Failure to prepare all the relevant information about the company will give the buyer leverage to reduce the value of the business – and no one wants to haggle over their nest egg. Jeﬀ Barber (left) is a partner at BTG Corporate Finance 0845 678 2902 jeﬀ.barber@btg-corporatefinance.com

Business Reporter · June 2014

an independent report from lyonsdown, distributed with the daily telegraph

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Maurits van Rooijen, CEO of the London School of Business and Finance, tells Joanne Frearson why successful entrepreneurs don’t always make the best exit strategists…

HERE can be a paradox between being a successful entrepreneur and putting an exit strategy in place to gain maximum value for your business, according to Professor Maurits van Rooijen, rector and CEO of the London School of Business and Finance. Van Rooijen is certainly qualified to pass judgment, having been involved in setting up di f ferent busi nesses vent ures w it h i n universities – such as overseas campuses – and turning round schools that were not as financially or academically as sound as they were expected to be. “The public sector nowdays is as commercial as the private sector,” he says. “Obviously in order to generate enough money to deliver high-quality research, you need to make sure you have resources. Until recently education was very much seen as a long-term investment, but I have recently seen [more of an] appetite for investors to step in and turn things around. Private equity is definitely more visible.” He believes it is important to start off with a possible exit strategy for a business at the very point of its creation. “I have been involved in many new ventures,” says van Rooijen. “There have been new ventures where they had exit strategies set for four or five years after inception, when it got to the next stage of its development process and needed a radical change of the original concept.” However, not all exit strategies are positive, and companies should prepare for the possibility of a negative exit when they are set up. Van Rooijen says: “It is part of the reality of setting up new things. You can’t expect everything you set up to be successful. If it was that easy everyone would be extremely rich. “I have been in a guiding role for some start-up companies that did not make it. I always say, first of all, treat it as a learning process for those who are involved in it. Then you sit back and ask why did not this work? Were the wrong people involved in it?” Van Rooijen explains if you prepare for the worst case scenario it is possible to prepare for things like costs of an exit, reputation risks related to a failed venture and protection of the people involved. He says: “When an entrepreneur steps into a venture they never think about exit strategies. They are completely focused on the success, they believe in it and are driven by it. The very idea that you would fail is something you would carefully lock away – that is why entrepreneurs are so successful, and why they take a risk that you and I might not take. It is almost a

Exit strategies

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It’s part of the reality of setting up new things. You can’t expect everything to be successful

Maurits van Rooijen says new businesses should not shy away from planning for the worst

characteristic of the entrepreneur. Now the problem of that, of course, is that the reality is quite different. On the one hand, you need to have that enthusiasm, but your starting point should be the very opposite. “You should start with, how much is it going to cost me to fail in this project? What is the exit strategy? How is it going to be implemented? What are the financial consequences of it? What is the reputational damage? Is it going to cost? “You actually have to think of it in terms of failure which is the opposite of what an entrepreneur normally does. That is what I call the paradox. On the one hand you are capable of having that positive thinking and never ever doubt you are going to be successful; but at the same time, force yourself through that professional process of thinking through all the details of an exit strategy. It is balancing that

entrepreneurial emotion and energy with a down-to-earth doom scenario.” Van Rooijen explains that the kind of exit strategy you should plan depends on your venture. He says: “First of all, an exit strategy normally costs money. It might be a bankruptcy, which is the hard exit strategy, but most of the time you will try to do this in a soft exit, so you need to calculate how much money that costs. “Secondly, you would try to do it in such a way to limit reputational damage. Businesses are suppose to be successful all the time, and you do not want to be associated with things when they go wrong. You need to think through how you’re going to present this in such a way that reputational damage is as low as possible. “The third [point] is related to reputational damage. Very often you have customers that have obligations, and your exit strategy needs

to think about what you are going to do to deliver those obligations.” For example, in the education sector, he says: “You sign up people for quite a long time and you need to make sure the exit strategy guarantees they won’t be disadvantaged. Exit strategies need to be thought through in great detail, to make sure you do not have to deal with a crisis that you cannot control. “Setting up a new business is a little bit of a gamble. You have to make sure you know how much you can gamble, what are your parameters to gamble… you can’t just gamble and assume you are going to win.” It is important to look at all possible scenarios when creating a company and think of an exit strategy first. Although an entrepreneur might be passionate about starting a company and be very successful, they should also have a doomsday scenario in mind.

Business Reporter · June 2014

an independent report from lyonsdown, distributed with the daily telegraph

Exit strategies

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Experts: exits should not be at shareholder UK firms optimistic about expense Confidence in the recovery is growing in firms, says a recent survey

By Joanne Frearson

COMPANIES are becoming more confident about the UK economy and looking to take advantage of the opportunities and realign their portfolios. In the Moorhouse 2014 Barometer On Change survey, results showed that optimism around overall economic growth was itself increasing, with 69 per cent of respondents expecting at least 6 per cent a n nua l g row t h i n t hei r organisations over the next three years, compared with 55 per cent in 2013. Stephen Vinall, managing director of consulting firm Moorhouse, says: “What we have seen is a lot of positive data.

A GOOD exit strategy should be about making sure an exit is foc u sed on ma x i m i si ng shareholder value, not just getting out a business for the sake of it, according to KPMG. A ndy Cox, head of transaction services at KPMG, says: “A lot of it is about improving the quality of your portfolio and working out what their best strategy is. “One of the key things about what makes a good exit is to make sure it is focused on maximising shareholder value and there is a clear strategic goal. Actually thinking through what to do with the capital afterwards, and where greater

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growth, survey reveals

Organisations are becoming much more focused in terms of what fits into their strategy. That would mean making a clear move to exit bits of the portfolio that do not align. Organisations are either slimming down or aligning their portfolios.” According to the survey 38 per cent of companies focused on defining their market position, compared with only 9 per cent in 2013. Respondents also indicated that the scale and rate of change their firms face in the coming year will increase, and if they want to enjoy a share of the economic growth they must act decisively to address the challenges this presents.

returns can be made – it should not be just about making the company smaller. “We are seeing a lot of companies not exiting entirely from situations, but bringing in partners. This is particularly true in the energy sector, where you have a big power project and capital is reasonably short. It is about bringing people in and sharing the risk and so on. “It is particularly common where you have big capital extension long-term projects which go through a construction period. Offshore wind, for example, would be an obvious one, where people want to recycle capital to get things off their balance sheets and get higher returns somewhere else.”

Energy companies in particular are taking their time over sales processes

Companies have also become a lot more focused on vetting potential buyers for a sale. Jonathan Boyers, corporate finance partner at KPMG, says: “The sale process is happening over an elongated period of

time. Sellers are talking to the more obvious buyers and working out sales in more intensive interactions than would have happened in the past. Sales are being tailored towards the right buyers.”

With the recovery, exit becomes a realistic possibility again Management succession is often top of the priority list INDUSTRY VIEW

s the recovery appears to have begun in earnest in 2014, exit becomes a realistic possibility again, following a period when most potential sellers of businesses would only commit to an exit in desperation. Now one can consider what is the right time to exit. Is it now? Is it next year? Have we actually considered exit at all?

Exit considerations Most owner-managers have never exited a business before, and many generalist business brokers exploit this with promises of high multiples/valuations and many potential interested parties. However, the reality for the majority of British businesses (typically ownermanaged SMEs) is that at the time they want to sell, there will only be a small number of truly interested parties. Not only that, the traditional owner-manager will be inherently intertwined in the

operations, revenues and overheads of the business. Hence, without a lot of forward planning, the owner-manager will have to remain involved in the business long beyond the date he/she gives up control, while not having realised the full consideration they were looking for and subject to an earn out. They will also face being an employee with a boss rather than an entrepreneur free to do what they like. Hence, for many exit strategies, management succession is the top of the priority list, which means investing early in strong management. This can have a useful added advantage, as strong management will often drive growth, but can also be incentivised in a manner that could make them a buyer as well.

The valuation For valuation, the most important attribute is the likelihood of future cash flows. Therefore, recurring income is the holy grail, so long as there is growth with

it. But, by recurring we don’t necessarily mean contractual. A five-year history of a client consistently repeat purchasing is arguably more attractive to a buyer than a five-year contract ahead that includes a clause allowing a customer to terminate because of a change of control.

The acquirer For every sale, we need to think about an acquirer. Acquirers prefer off-market transactions. They like to be able to target specific businesses whether directly or through a search. They prefer not to enter into a competitive process or auction. They want to minimise change in the target business while they get to know it. As part of an exit strategy, have you considered what will make you attractive to a “strategic” or “trade” buyer? Is it your brand, your product, your technology, your people, your customers? Once you have identified what an acquirer might find attractive, you need to think about how the acquirers will find that out.

This might involve exposure in local trade press, in blogs and online articles covering these areas with keywords or carefully constructed web pages. It might also include involving advisers focused on acquirers – buy-side mandates – and ensuring your business is on their radar. These are firms that will carry out acquisition searches for their buy-side clients – often to very specific criteria. They are much more likely to be serious in their interest rather than just curious. Simon Blake is a corporate finance partner at Price Bailey Corporate Finance Limited +44 (0)800 434 6460 www.pricebailey.co.uk/exit

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Exit strategies

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Pfizer ‘will be back’

By Joanne Frearson

US-BASED drug giant Pfizer has dropped its longrunning takeover bid of UK pharmaceutical company AstraZeneca, following AstraZeneca’s rejection of its £69billion offer. Pfizer had until May 26 to make another formal offer to AstraZeneca or cease its pursuit of the company for another six months. Ian Read, chairman and CEO of Pfizer, said: “We continue to believe that our final proposal was compelling, and represented full value for AstraZeneca based on the information that was available to us. “As we said from the start, the pursuit of this transaction was a potential enhancement to our existing strategy. We will continue our focus on the execution of our plans, bringing forth new treatments to meet patients’ needs and remaining responsible stewards of our shareholders’ capital.” But not all analysts believe a merger between the two is completely off the cards. Chris Beauchamp, market analysts at IG Index, said: “It seems likely that the US drug firm will be back with a fresh offer. It seems AstraZeneca is determined to rebuff Pfizer, choosing to say no to the latest bid without putting it to shareholders. However, I think it is highly likely that

the US firm will come back, perhaps in six months’ time. “The important development here I think is that Astra rejected the deal without any recourse to its major shareholders; some of them have already come out to say that they would be communicating their displeasure to the Astra board.” Beauchamp believes Pfizer needs Astra’s stable of drugs to help bolster its own portfolio and give it breathing space to develop new drugs. According to AstraZeneca, Pfizer’s final proposal fell short of its value as an independent science-led company. A s t ate me nt on t he compa ny ’s web site by chairman of AstraZeneca, Leif Johansson, read: “Pfizer’s approach throughout its pursuit of AstraZeneca appears to have been fundamentally driven by the corporate financial benefits to its shareholders of cost savings and tax minimisation. “From our first meeting in January to our latest discussion yesterday, and in the numerous phone calls

Growth offers Güd vibrations By Joanne Frearson DEMONSTRATING international growth can help a company obtain a buyer when it wants to exit a market and push up the value of the firm, while also looking for a potential acquirer overseas may give a company more prospects in their selling strategy. Peter Gray, partner at Cavendish Corporate Finance and author of the book Selling Your Business: A Strategy For Success, says: “Overseas expansion can add value by allowing you to demonstrate the significant overseas growth potential of the business.” He uses the example of the sale of high-end dessert manufacturer Gü, the owners decided to launch the product in France under the

Frü brand in order to establish the company’s international growth credentials. France was thought to offer the best prospect of success of the countries considered for Gü’s first international foray. The firm obtained listings in several French supermarket chains and was able to achieve sales growth in this market. On the back of this the company sold to Noble Foods, the UK’s largest egg supplier, at a premium. According to Gray, it is important for companies to make themselves known to overseas buyers. Overseas trade buyers will frequently outbid their UK equivalents, which reflects a preparedness to pay a strategic premium to enter

in between, P f i ze r h a s failed to make a compelling strategic, business or value case. The board is firm in its conviction as to the appropriate terms to recommend to shareholders. “AstraZeneca has created a culture of innovation, with science at the heart of its operations, which will continue to create significant value for patients, shareholders and all stakeholders of AstraZeneca. As an independent company, the entire value of AstraZeneca’s pipeline will accrue to our shareholders. Under Pfizer’s final proposal, this value would be significantly diluted. “We have rejected Pfizer’s final proposal because it is inadequate and would present significant risks for shareholders, while also having serious consequences for the company, our employees and the life-sciences sector in the UK, Sweden and the US.”

was advised by Cavendish, who suggested the most likely buyers were US payday loan businesses looking for a scalable online UK platform. According to Gray, at the time US payday lenders were suffering from interest rate caps in their domestic market, and looking to diversify geographically to reduce their exposure to the US market. Cavendish advised them to sell its high street shops and make a significant investment in online platforms to entice US buyers. The firm was sold to US-based Dollar Financial Corporation. Although European and US buyers still dominate the European expansion led to Gü’s recent profitable ranks of overseas acquirers, sale to Noble Foods Gray expects there to be an increase in purchases from India, China and the Middle East in the coming years. Sectors to watch out for which may have an exit strategy in mind, Gray says, include “anything information services or data related”, due to the value that company data potentially holds.

the UK and European market. He says: “If you have a good asset – liquid business in this market – the message is there is no shortage of sellers in terms of private equity and trade, particularly overseas buyers. We are currently selling two thirds of our buyers for very attractive prices to overseas clients.” Cavendish advised foreign exchange group World First on its sale to US private equity firm FTV Capital Group last year. He says: “We are seeing US private equity outbid their UK counterparts, in some cases by a considerable margin.” A US buyer also snapped up UK payday lender Express Finance. The lender

Good alignment is the key to a successful exit A SUCCESSFUL exit for a company is about ensuring there is good alignment with management and the board has been clear on the desired strategic positioning for the business, according to private equity firm 3i. Alan Giddins, managing partner of private equity at 3i, says: “Exit planning is something that starts on the day you invest in a business, by ensuring the board has a clear view of the strategy, and how that links into the likely buyer universe. “Detailed planning for an exit starts at least 12 months ahead of formally starting a sale process. Exit analysis is a key piece of the diligence process at the time of investment.” In the last 12 months, 3i sold software and services company Civica following its investment in the firm in 2008. “It was a business we had taken private in 2008 and which was well suited to private equity ownership,” says Giddins. “It was an international business with a strong management team and a good financial track record. During our ownership it delivered solid growth within a fragmented marketplace, and made more than ten bolt-on acquisitions which further enhanced returns. “Preparation ahead of the sale process was the key in achieving a strong outcome. It was also about understanding who the core buyer group was and providing them with early access to management. Before the process started formally the core buyer group already had the chance to build their investment thesis.” According to Giddins, exit processes are time consuming. He explains the need to make sure management are not distracted from focusing on the trade performance of the business.

Business Reporter · June 2014

an independent report from lyonsdown, distributed with the daily telegraph

Exit strategies

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Jenk’s The big interview Sophie Javary eye view HAVING an exit strategy would seem a self-evidently sensible idea for any entrepreneur, yet some practitioners view them as a sign of weakness rather than prudent self-preservation. Context, scale of resources and timing affect the implementation of an exit strategy. A conundrum to be sure. Practitioners are divided. The “die-hards” view exit strategies as a lack of commitment by the owner, manager or investor. This view contrasts with the “pragmatists”. They believe that having an exit strategy is critical for future success. Any exit strategy is a form of risk management to deal with a future that remains unknown – even with the best plans in place. Individuals and, by extension, organisations, are more risk seeking in situations of perceived loss and stress. This reflects two competing behavioural theories. “Utility” theory argues that an investor seeks to maximise profits. “Prospect” theory suggests the investor’s choices are framed by the actual situation and then decided upon. For example, this leads the gambler, facing losses, to double his bets rather than quit. This dynamic also partly explains why those who do have an exit strategy sometimes change it in the heat of the moment. The issues of timing, level of control and payment terms can swing one across the spectrum of choices. For the entrepreneurs, business angels and venture capitalists, a range of exits exists. As the owner, manage the company’s cash flow for your own needs, while keeping the enterprise solvent. Use an IPO to attract new financing as well as potential future buyers. Make an internal transfer to staff. Dispose of your shares to a friendly buyer. Refinance. Allow your company to be acquired or merged on your terms. Finally, liquidate at a natural point An exit in a proactive manner strategy to realise a net gain. costs Exit strategies are just as relevant in the nothing job market. Beyond – and can maintaining a pristine CV and well-nurtured buy you network of contacts, the Earth! have a “f***-off offer in your back pocket”, as Rupert Murdoch advised me years ago. His rationale was that it reinforced confidence to deal with “stupid” bosses and their companies, advice his own publishing staff seem not to have heeded. So don’t prevaricate. Consider your exit strategies as part of an overall strategy and act upon them. An exit strategy costs nothing and buys you the Earth! Justin Jenk is a business professional with a successful career as a manager, adviser, investor and board member. He can be found at www.justinjenk.se

You do not want to disrupt a business you are trying to sell. It can have a ripple effect

By Joanne Frearson

OPHIE Javary, deputy head of corporate finance at BNP Paribas Cor porate & I nvest ment Banking, has just arrived from Paris as she greets me in the boardroom on the top floor of the bank’s London headquarters. She is based in the Paris office, but is in London today for meetings. The bank’s origins are in Paris, and many of its workers travel back and forth between the two capitals. There as many French accents as there are English drifting around the office, which has a culturally diverse feel about it, Paris chic meets iconic London. Starting as a credit analyst at Bank of America 25 years ago, Javary has risen to the top of her game. She has achieved the highest decoration in France, the Legion of Honour, established by Napoleon in 1802, in recognition of the work she has done in the finance sector. She says: “I did a lot of privatisation work for the French government and was involved in a lot working groups with the market authorities. I helped start the process of book-building in equity capital markets.”

In January, she was promoted from managing director to deputy head of the corporate finance department covering Europe, Middle East and Africa. She explains that exit strategies can be triggered by many sorts of factors, such as debt reduction, rationalisation of a business and taking advantage of valuations. Javary says: “Sometimes you have companies that have a higher level of debt and want to do asset sales to reduce the level of debt and be less under pressure by the ratings agency. “Companies may want to rationalise and focus on the core businesses. They also may want to take advantage of valuations, where in certain areas of the business it can be effectively more attractive to sell part of the business rather than hold it within a group.” Her teams have advised on many high profile deals, including the sale by French media group Vivendi of its telecom business SFR. She says: “We advised Vivendi on the sale of French telecom firm SFR. Clearly that one was triggered by the fact that Vivendi wanted to rationalise its portfolio of activities and wanted to be focused more on its media business.

Above right: Sophie Javary of France’s Banque National de Paris; below: Javary oversaw France Telecom’s major divestments after it bought Orange

“Vivendi was seeing there was attraction for telecoms business, and that SFR would probably fit better with another shareholder than Vivendi, and it was sold to cable firm Numericable. We are seeing a trend for cable and mobile companies to create synergies between each other.” According to Javary, the Numericable and SFR transaction was a logical move for the companies to move to the next level, and she is seeing similar things happen in other companies. For example, Vodafone bought Spanish cable company Ono to aid its growth strategy for Europe. Javary was also involved in the sale of French media firm Lagardere’s pay television business Canal Plus to Vivendi. Lagardere had a minority stake in Canal Plus and did not have any influence over its strategy. She says: “There was a lot of pressure from Lagardere’s investors on why they had such a large stake in a company, when they did not run it themselves. “Lagardere last year divested from its stake in Airbus parent EADS. Its stake in the company dated back 20 years and it did not really make sense to only be a financial investor as a company like Airbus did not need

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Exit strategies

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The need to plan and prepare for exit is vital This is an opportune time to consider a sale INDUSTRY VIEW

any more strategic shareholders such as Lagardere at the outset of EADS.” Companies can also be forced to sell assets as a result of a merger if they are not in the interests of fair competition. Javary says: “Following their recent merger, Swiss building material group Holcim and cement firm Lafarge are going to be forced to divest. The impact this merger has on their competitive position is against anti-trust regulations in Europe. They have decided they will appoint a special committee that will be in charge of overseeing those asset sales.” Debt can also be a reason why companies have an exit strategy. She says: “Ten years ago, after it had bought Orange in the UK, France Telecom had so much level of debt that it had to exit from a number of companies just to reduce the amount of money it owed.” A lt hough some companies are restructuring and selling assets because of debt, the current low interest rate environment is also fuelling acquisition activity. She says: “You have a very liquid highyield debt market with low interest rates. There is a capacity for private equity investors to go after these assets that sit within corporates’ balance sheets in a very

aggressive way. Exit strategies will be a function of these markets and we will see some corporates taking advantage of this particular situation.” But it is important to get an exit strategy right, so businesses involved can restructure or continue to grow. She says: “What makes a good exit is that it first has to make sense within your own strategy for your shareholders and investors. If it is something that nobody understands in the context of the overall v ision of the management of the company then I think that is what can first go wrong. “The second thing is that often corporates are caref ul about t he impact on management and employees of the divested business. Very often, they are concerned about protecting the employees that are effectively going to be in the exited units. You do not want to disrupt a business you are trying to sell. It can have a ripple effect on management, employees and the activities you keep. “The third element is the choice of the new shareholder. Corporates want to make sure the assets that they have divested end up in safe hands in terms of the future of the divested unit and there is not too much debt put on the future company.

“One way is for the company that divests to keep a minority stake in the business that it divests from, in order to make sure it effectively continues to have a say from the board on the decisions that will be taken in the future. “The last thing is how well the process is run, which is why advisers must be chosen carefully. Often those companies are listed so naturally there is a need to have transparent processes with the market aut hor ities t hat look af ter t hese transactions when they are big. “Because of the nature of these exit strategies, where you have to have perfect execution, you have to have trust. The fact you have a long established relationship with a seller who is exiting is a factor which is important in terms of making sure the banks and advisers are able to keep confidentiality. “Banks that have been retained are often close to the company for a long time and have long established relationships – the relationship angle is important.” Exit strategies are a part of a business’s life cycle. They can help firms grow, develop and rationalise, or help them get out of a debt situation – the kind of strategies Javary will continue to spearhead when she returns to Paris.

or business owners considering the sale of their company, the ultimate goal is to sell it for the maximum possible value. The need to plan an exit strategy is imperative. “The most advantageous time to consider a sale is when you don’t necessarily have to sell”, explains Simon Daniels, a director at KBS Corporate. “This is an opportune time to consider a sale. With the M&A market seeing a significant rise in 2013 and confidence starting to return to the market, we are witnessing strategic growth acquisition activity across a range of sectors. Investment groups and PLCs with large cash reserves are showing more enthusiasm to acquire, along with an increasing number of cross-border transactions. International acquirers continue to show a fantastic appetite to acquire within the UK, as it remains a very attractive foothold within Europe. It is the return of this “competitive” interest from these acquirers which is helping to drive attractive deal values! We anticipate that the current high levels of acquisition activity will increase even further throughout the forthcoming year and into 2015.” Prospective acquirers will place a strong review on current financial performance, growth forecasts and future contractual income. It is important to ensure this information is up to date. Strategic opportunities, such as a diverse customer base, cross-selling opportunities and a quality supply chain, will also create acquisition interest. The right advisor will provide you with the consultancy needed and discuss quality techniques that can be used to present your acquisition opportunity in its best possible light. With a favourable M&A market and a number of exit routes available to sellers, quality advice and preparation will help to provide the necessary platform to maximise the level of interest and deliver multiple competitive offers, ultimately resulting in the optimum deal value. 0844 38 77 466 simond@kbscorporate.com

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Inspector Dogberry Inspector Dogberry has discovered in his investigations into exit strategies that not all work out. Dogberry has been following the proposed merger of equals between communication groups Omnicom and Publicis. The merger of equals was announced in July 2013, and future scalability and internal synergies of the combined company were expected to generate efficiencies of $500million. The merger was to cope

with challenges and new developments in the communication and marketing landscape such as the explosion of big data and changes in consumer behaviour. If the deal had gone ahead it would have created a global communication company with a market capitalisation worth approximately $35.1billion, and the merged group would have had more than 130,000 employees. However, in May the proposed merger

Mergers, acquisitions and leveraged buyout activity levels will continue to rise in the US mid-market, according to a survey of middle market dealmakers by lender GE Antares Capital which Dogberry has had his nose in recently. The research showed that more than two-thirds of survey respondents expected the mid-market M&A environment to expand over the next 12 months. John Martin, president and CEO of GE Antares, says: “Liquidity is everywhere right now. Middlemarket growth continues to outpace the overall US economy – and the demand for financing that growth, organically and through M&A, is high.” However, more than one third of respondents believe new banking regulations have negatively impacted their businesses. “This is something that middlemarket companies and buyers will need to watch closely as they look for new opportunities to invest,” says Martin. Twitter: @dogberryTweets

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Exit strategies

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was terminated by mutual agreement. In a joint statement, Maurice Lévy, chairman and chief executive officer of Publicis Group, and John Wren, president and “CEO of Omnicom Group, said: “The challenges that still remained to be overcome created a level of uncertainty detrimental to the interests of both groups and their employees, clients and shareholders. “We have thus jointly decided to proceed along our independent paths.”

European luxury shoe brand Kurt Geiger has completed a management-led buyout and is now operating as an independent company. Kurt Geiger was a previous division of The Jones Group, which was acquired by private equity firm Sycamore Partners in April this year. The company operates in more than 180 multi-branded luxury and premium shoe concessions in leading British and international department stores, including Harrods, Selfridges, House of Fraser, John Lewis, Debenhams, David Jones and Myer. The company also sells its own iconic footwear brands, including Kurt Geiger London and Carvela, in more than 70 global locations, as well as premium department stores in the UK and around the world.

The law is an asset exit strategies achieved through cross-border m&a are not realising their full potential, according to a report published by global law firm eversheds, because of weaknesses in the deal process. in a study by the law firm, nearly half of businesses believe that the most common cause for deals not successfully achieving their goals is due to a failure to address post-deal integration from the early stages of deal due diligence. robin Johnson, m&a partner

at eversheds, says: “our research shows that the overriding factor contributing to the success of a cross-border deal, is the presence of a core team providing the ‘connective tissue’ to link all the phases together, taking the deal from the inception stage through to post-completion integration.”

By Natasha Clark, web assistant

u Editor’s pick Growth Business www.growthbusiness.co.uk/growing-a-business/exit-strategies This business growth website is just as useful for getting out of an area of business as it is for getting one set up. It features advice on how to get your affairs in order, tips and case studies from the experts and information on what to do after you’ve exited. Useful, informative and written in a plainspeaking manner.

Strategic Exits Blog

Law Donut

www.exits.com/ blog

www.lawdonut.co.uk/law/ exit-strategies

Specialists Strategic Exits will help you sell your business and get the most out of it, with this accompanying blog covering all aspects. It details the pros and cons of each model, and features case studies of entrepreneurs who have let big businesses go, and how they did it.

Providing a step-by-step guide of what you need to do to exit your business, this blog is aimed at the inexperienced SME owner. Including an accessible FAQ, information on tax options and advice on selling a family business, this is a comprehensive starter’s guide to exits.

Small Business Chronicle www.smallbusiness.chron.com/ business-exit-strategies

Business Valuation (£1.49 – iOS)

Scutify (Free – Android, iOS)

Thinking of selling but not sure how much your business is worth? This app will give you an approximate guess based on your discounted cash flow.

Thinking of floating your business on the stock exchange? Scutify is the financial social network app that aggregates stocks and information in real time.

This hidden gem on the Small Business Chronicle website is packed with great examples of exit strategies and detailed discussions of how to make it work for you. It has case studies, how-to guides and advice for different types of businesses, from non-profits to family firms.

Is the bank on the way back? Independent advice can ensure successful transactions INDUSTRY VIEW

anagement Buy Outs (MBOs) have always been a popular succession route for shareholders of private businesses, providing loyal managers an opportunity to acquire the company. The concern for most MBO teams is how to fund the acquisition without raising an often significant sum personally. Traditional transactions were funded by either the company securing bank funding or through venture capital. The recent banking crisis, however, resulted in limited appetite for banks to provide

funding, therefore a significant proportion of MBOs required vendors to provide the entire funding themselves. This was usually structured through a willingness to accept sometimes an entirely deferred consideration transaction. Throughout the recession, venture capital was available for funding these transactions, but they too often struggled to attract bank funding, requiring them to take more equity away from the MBO team or not being able to reach the valuations required by the vendor. However, the banks’ appetite for owner-managed businesses has returned and, while there is still a focus on securing funding from the company’s assets (ABL), cash flow loans are also on the way back. This enables vendors now to look at various

structures for MBOs. They can now benefit from a larger proportion of consideration at completion, reducing their financial exposure to a business they no longer control, or they can bring in a venture capital funder to help the management team buy the vendor out sooner. Similarly, Chantrey Vellacott has also seen the refinancing of historic vendorfunded MBOs. This allows MBO teams, which had felt hamstrung by restrictions attached to deferred consideration, to pay off vendors early, allowing them to plan

more successfully for working capital and future growth. Vendors and management can now feel more comfortable that funding is out there and, with good independent advice, they can achieve successful transactions. Debbie Clarke (left) is head of corporate finance at Chantrey Vellacott DFK LLP www.cvdfk.com dclarke@cvdfk.com

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Exit strategies

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TAKING THE EASY Strategy is all well and good, but there’s more than one way to leave the rat race – and some are better than others. Joanne Frearson reports

ExpertInsight

EGARDLESS of strategy, not all exits go smoothly, and many problems can occur as a result of a business closing down such as strikes, protests or even “boss-napping”, while at the quieter end of the scale, relationships with suppliers can become difficult. Damage limitation is of great importance when it comes to exit strategies. There are different styles of closure, and companies are often faced with the choice between an exit that is big-bang or slow-burn. Rob Ware (inset, opposite), head of exits at KPMG, says: “An accelerated closure is normally used where there is high risk in continuing to run the business – for example, where cooperation cannot be secured from key customers, suppliers or employees, or where key management cannot be retained to manage a slower closure. “A more moderately paced closure could go on for many years after announcement. It is not unusual these days for groups to announce

closures of certain plants many years before actually closing them and effect complex transfers of operations and equipment to other international facilities. Indeed, we have seen this quite a lot in the past, with automotive plants where closures are often linked to changes in vehicle model and closure timelines can be lengthened by unexpected customer demand for the old model.” Regardless of what type of exit a company might have planned, though, there can be a big brand impact around closures. It is important for a company to get the communication right, and get it right early, says Ware. “There have been well-reported cases where text messages are used to make redundancies,” he claims. “A more sophisticated and human approach will almost always bring better results. Feedback should be encouraged to allow a real understanding of where the tensions lie, particularly around employee morale and small issues, which left unchecked could expand to

Six of the best to improve your chances INDUSTRY VIEW

reparing for an exit increases the chances of success and the level of valuations. Addressing the following areas will maximise both.

Management The less well developed your team, the more likely you will have to stay on post-sale. Start thinking about this two years before launching a process – a good team takes time to assemble, gel and build a track record.

IP ownership Demonstrating you own your intellectual property is essential to receiving value for it. The uncertainty of an IP dispute can make a sale almost impossible, while an inability to prove ownership will probably leave you on the hook for future problems. Start reviewing your IP 18 months before you launch a process.

Profile There’s no point being ready for exit if your acquirers aren’t – give them the chance to prepare, too. Targeted

PR will put you on the radar. Allow 18 months – make the most of annual trade shows – and intensify it in the final six months. Perhaps even let select, nonthreatening potential buyers know you’re thinking about longer-term strategic options ahead of a formal exit process.

change of control provisions which give a customer/supplier the right to terminate the contract on a sale. Extend the notice periods of key people. Reducing an acquirer’s risk in this way makes it more likely they will pay full value.

Working capital

A good corporate finance adviser will help with these issues, including when is the best time to sell, plus many more once the sale is underway, and will tell you what acquirers are looking for or are worried about. Appoint them early to develop a proper relationship – it will pay off later.

Excess working capital over the normal level is additional cash value for you. What’s normal? Most acquirers/investors start with a 12-month average. Explore opportunities for debtors to pay sooner and manage creditors – lowering the average working capital target and unlocking real value. Make sure you have detailed monthly management accounts to demonstrate it.

Contracts Lock in key customer/ supplier contracts, and extend their durations. Negotiate out any

Appoint advisers

Case study – Autodata Publishing Group Founded in 1975, Autodata is Europe’s leading provider of technical automotive information. Mechanics in more than 80,000 professional workshops rely on its data to help them carry out service, repair and diagnostic work on

17,000 vehicle models from 80 manufacturers, including cars, light commercial vehicles and motorcycles. Having brought in a new CEO, Rod Williams, and CFO, Debra Barr, to complete the management team, founders Richard Atherton and Dietmar Otto then appointed Livingstone to help them prepare for an eventual sale over a 12-month period. This preparation paid off as Autodata was sold in May to mid-market private equity house Bowmark Capital and the private equity fund of the Rothschild Group, Five Arrows Principal Investments, for a reported enterprise value of £143 million. Richard Fetterman, Partner at Livingstone, explains: “Autodata is a world class business and this was reflected in the huge amount of interest that we received from both strategic and financial acquirers. Careful preparation and a well-managed process were key to delivering the right result for the shareholders and the business.” Richard Fetterman (left) is a partner at Livingstone Partners LLP +44 (0)20 7484 4739 fetterman@livingstonepartners.co.uk www.livingstonepartners.com

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WAY OUT?

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become larger ones. Look at automotives – in particular in the UK, where there have been large-scale exits over the last 15 years. Peugeot closed its Ryton plant, prompting demonstrations outside dealership garages in London. “TVR closed its plant in Blackpool resulting in a high-profile demonstration, with about 500 TVRs convoying down to 10 Downing Street. When Rover famously closed its plant in Longbridge, there were widespread protests and petitions to the prime minister.” One way to reduce risk when a company is closing is by demonstrating a sense of community, claims Ware. “When Ford closed its last UK site in Southampton, it invested in new infrastructure in the area, and made charitable donations to local workforces, including minibuses to local charities. It appeared to be a well-managed closure where the shock was tempered by well-placed investment.” The automotive sector is not the only sector which has come under fire after a closure. “It happens in other industries too,” Ware says. “When M&S pulled out of France, there were large-scale protests in the streets of Paris. When Nokia pulled out of Bochum in Germany, there was an unfortunate float in the

Exit strategies

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carnival that showed people pierced on a spike coming out of a Nokia phone, with a slogan saying ‘Nokia connecting people’. The real impact on brands is difficult to assess, and while M&S have since re-entered the French market, it nevertheless weighs heavily on group boards.” Boss-napping has also seen a worrying increase in frequency, with employees taking captive senior members of management as part of negotiations around closures. “There have been a few recent notable cases,” says Ware. “One was in China last year, where a US boss was taken captive by Chinese workers as the apparent result of a communications breakdown. Goodyear Tyre workers in France also held two bosses captive earlier this year in a tangle around wage negotiations. This follows other incidents with Caterpillar, Sony Corp and 3M.” There are other pitfalls in closure that need to be properly prepared for and relationships with suppliers can suffer dramatically. “In the worst cases, this can cause stock-outs and in high complexit y manufacturing lines,

– stock-outs can cause tens of thousands of pounds in penalties a day because they bring the whole production line to a halt,” Ware says. “Strike action is another key risk. In Belgium, France, Spain and Portugal, union relationships can be sensitive and difficult. It is not uncommon in Belgium and France, in particular, for employees to stockade and barricade assets.” In the UK and parts of Europe, there can also be big pension scheme issues. Ware says: “Great care needs to be taken around defined benefit schemes in order to not unnecessarily trigger pension claims and to find a solution to meet the legacy funding requirements for deficits which may go forward many years. “Care also needs to be taken on the risk of the clawing back of government grants and subsidies. There have been some notable cases where grants have been repaid by groups leaving the jurisdiction after receiving employment and development incentivisation.” Unexpected risks can also occur even after the company has gone through the closure process and the premises are empty. “I have seen cases in the past where deaths have happened on empty sites following break-ins,” says Ware. “Intruders, often motivated by things such as copper theft, can become injured or worse. Significant

uninsured liabilities can be generated if the right precautions are not taken around security.” According to Ware, every good closure starts from setting clear governance – a steering framework that includes people who are operationally knowledgeable and also a little bit cynical. Some of the people who are the loudest in protesting about process are often good members of a steering committee, because they keep you honest, and bring a level of challenge and testing of decisions. He says: “There is also a need to build your exit plan on a robust data platform. That is not always straightforward, not least because closure is a very sensitive subject. Closure assessment is not something that can be shared widely, and you need secure confidentiality protocols, nondisclosure agreements and confidential reporting lines. There is a balance to be struck between bringing knowledgeable people into the loop to develop closure plans versus trying to develop a plan with imperfect data.” Companies need to be aware of the potential knock-on effects business closure can have – planning for disastrous consequences and implementing a clear communications process, even if it’s easy to put off until the next day, is critical to address for firms facing an exit.

Stay in control and achieve the right price The key questions to answer if you are considering an exit INDUSTRY VIEW

or most owner managers, making a significant capital gain from a sale of their business is a key part of their long-term financial planning. However, many fail to fully achieve their objectives due to insuﬃcient time being devoted to planning an exit strategy well in advance of the actual transaction. In our experience, a lack of preparation can significantly depress the sale price. It is naturally easier to focus on the day-to-day running of the business than to think about long-term strategic decisions. There is often also an emotional unwillingness to consider the future. But if you are seriously thinking about an exit, you will need to be able to answer some key questions. For example: Who will buy my business? How can you make the business more attractive to them?

Is my business robust enough to stand up to a buyer’s due diligence processes? When do I want to leave? Do I want a complete exit? You can answer some of these questions in the following ways:

Positioning All potential buyers will have different reasons for considering an acquisition. You need to understand them so that you can position the business appropriately, emphasising the right points to the right buyer.

Management Ensure that the business can be run day-to-day without your involvement by bringing on junior management. You may still remain involved at a strategic level but the business should run smoothly whether or not you are there. This increases your chances of being able to leave quickly after the sale without an extensive lock-in period.

involve a joint venture or strategic alliance with another business, or even fundraising for growth or an acquisition. No planning means the vendor will probably still be too central to the business and therefore more likely to be required to stay around, which means there won’t be a clean exit. Also, if you leave it too late there is more chance that the business could get past its best and you as a vendor will want to sell for any price. Putting the effort into planning means you can stay in control of the sale process and ensure that it achieves the right price and meets your timetable.

Q&A Anticipate the questions that a buyer would ask and test the business’s ability to answer them. You could even undertake your own “mini” due diligence exercise to anticipate the real thing. By ensuring that

Exit planning needs to be thought about at an early stage and is not all about putting the For Sale sign up. Long-term planning could involve separating and then selling parts of the business. It could

James Finnegan (left) is a corporate finance partner at Bishop Fleming Chartered Accountants 01392 448800 jfinnegan@bishopﬂeming.co.uk

Research Locate the strategic buyer who must have your business. This is often not obvious, and the net should be cast widely, using international networks when appropriate.

management information is up-to-date and coherent it will be easier for you to stay on the front foot and control the process.

14 · Business Reporter · June 2014

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The future

Tom Stoppard

“

Every exit is an entrance somewhere

Strategy and preparation hold the key Don’t jeopardise a lifetime’s work

Exit strategies Industry view

Business Zone

stablishing and growing a business can be rewarding, but achieving the right exit can be even more so, both from a financial and emotional perspective. For many, the sale of a private company is the culmination of a lifetime’s work with just one opportunity to get it right. A focused exit strategy and wellmanaged sale process can have significant influence on the value achieved, as well as the time and effort required during the sale process. Whether selling with a strategic mindset, such as requiring investment for the next stage of growth or internationalisation, or selling out due to, say, retirement, the key to obtaining optimum valuation is through strategy and preparation. Sellers should develop a strong management team, review the asset and cost bases, ensure corporate tax affairs are upto-date, tighten management controls and working capital management, and understand and demonstrate the growth opportunities. Preparation helps sellers control the

exit while minimising disruption to daily operations. Sellers can also better anticipate, understand and actively manage potential buyers, keeping the process on track. Formulating an exit strategy has several benefits for sellers: pinpointing their own key personal objectives, focusing on the right time to sell, identifying the most likely strategic purchasers whether these are within the same industry sector or not, assessing company attractiveness to buyers, and highlighting potential gaps in buyer valuation versus price sought. There’s a range of possible exit routes to achieve differing sellers’ objectives: trade sale, management buyout, private equity investment or even a listing. However, not all options offer maximum value, and sellers have their own individual objectives and priorities to consider. Careful alignment of these with the right strategy should produce a best-fit solution, enabling a successful exit and ultimately providing sellers with the reward they seek. Implementing a sound exit strategy, with the support of experienced advisers who consider the most

appropriate scenarios, will help achieve a successful exit.

Andrew Walker (bottom left) is a partner, corporate finance, Johnston Carmichael, Aberdeen 01224 212222 www.jcca.co.uk

and growth for SMEs

relinquish cash balances and banks’ reluctance to lend, there is now an increasingly positive attitude on the part of financial institutions willing to help fund expansion plans. The SME market is currently a buyers’ market. Buyers are coming to us with clear strategies for what to buy and how to structure the transaction. The key to ensuring these strategies come to fruition is understanding clients’ needs: a generic approach will

not result in the most effective outcome for a business. Buyers need to understand why the acquisition is being made to ensure they employ a suitable mechanism to enable the price to be “tested”. This often means deferred consideration and earn-outs. Over the past year we have seen an increase in large-scale management buy-outs as management staff recognise the benefits of business ownership. Owners looking to exit could do worse than nurturing the entrepreneurial talents in

When should you start the process? Prepare early – a minimum of 12 months ahead. It will more than justify the time and effort. Take a look at your business from a buyer’s perspective. If you were buying the business how would you justify the investment? Once you’ve identified any areas that need attention you have time to make changes. Is every business saleable? In theory yes – it depends on the price. In practice the answer is no. Acquiring a business via a trade sale carries more risk than acquiring a plc, and this is reflected in a higher proportion of unsuccessful deals and lower multiples. Business owners should understand where the risks lie in their businesses and take steps to mitigate them.

In focus: A continued period of vibrancy ith the UK economy enjoying a definite upturn, we are seeing increased confidence on the part of business and lenders, particularly in the SME market, as more SMEs look to benefit from that resurgence and grow their businesses, often through mergers and acquisitions. While businesses’ growth aspirations may previously have been stymied by finance directors unwilling to

Q&A: The secrets to a successful sale

their own organisation. The activity we have seen in the SME mergers and acquisitions market over the past year cuts across a range of industries and sectors from EU-based financial institutions to hi-tech companies, indicating a continued period of vibrancy and growth for SMEs. Yavan Brar (left) is a partner in the corporate & commercial department at Herrington & Carmichael LLP, Solicitors +44 (0)118 977 4045 www.herringtoncarmichael.com

Is there an ideal time to sell? Ideally when the business is in a growth cycle before it starts to plateau, but this is only one aspect. Other indicators include: when a business is not ownerdependent, when it can demonstrate achievable growth projections, and when it has a diverse client base and recurring revenue streams. Where to start? Find out what’s involved in selling a business, get a free valuation, research what acquirers look for, understand deal structures and how to choose an advisory team. There’s a lot of free advice and information for business owners; being well informed gives you more control. Use it to create competitive tension – get several offers on the table so you have a better choice and negotiating position. Rob Goddard is MD of Evolution Complete Business Sales Limited +44(0)118 959 8224 http://evolutioncbs.co.uk

Business Reporter · June 2014 · 15

an independent report from lyonsdown, distributed with the daily telegraph

The debate When should management prepare an exit strategy? Richard Spink Corporate finance partner Burges Salmon It may sound like self-interest but, on this one, your advisers are definitely right: it’s never too early to plan for the exit. An exit strategy is integral to the broader business plan and, if you’re acquiring the business, should ideally shape the approach to the acquisition itself. Whatever the exit timeframe, developing key objectives early is essential. Some short-term objectives can be critical to delivering the longer-term plan, and many PE-backed businesses will adopt a 100-day plan at the outset with that in mind. Entrepreneurs may have more flexibility and broader personal objectives may play their part too but, for all except a very lucky few, the exit is a hugely significant moment that needs careful long-term planning. Few strategies survive unscathed on the way to exit, but getting the business into the best possible shape will help to maximise value and enable you to be ready for the unexpected. +44 (0)117 939 2218 richard.spink@burges-salmon.com

Rob Goddard Managing director, Evolution Complete Business Sales Ltd

Bill Good CEO Diverco Ltd

An exit strategy should, ideally, be part of a company’s initial business plan but, in my experience of hundreds of SMEs, this is rarely the case. My advice is to devise an exit strategy several years before a proposed exit. It takes significant time to create, requiring careful consideration of the owners’ long-term personal, financial and business goals. In a family business the top-level strategy may be to leave a legacy for the next generation, resulting in an operational plan centred on building fiscal stability and sustainable growth. If the top-level strategy is to achieve a premium exit price, via a trade sale for example, the operational plan is likely to centre on building strategic value to make the business more desirable and likely to realise a premium price. An exit strategy provides the framework upon which business plans develop and thrive. The earlier it is created the more likely it is to achieve a successful conclusion of the entrepreneurial dream.

Diverco has more than 45 years’ experience in selling family-owned businesses, and the succession or exit strategy should be considered when the family member first takes on the role of director. It is never too early to plan. The following generation needs to be fully consulted to see if they really do want to take on the reins. There are often too many assumptions made by both generations and seldom enough open dialogue. If an external sale is a possibility then a plan needs to be considered. An early discussion with a broker ensures the right plan is put in place, the first part of which will be in developing a team who can manage the day-to-day operations. Like any plan, it should be periodically reviewed and a serious strategy for the sale should be detailed three years beforehand. Diverco, as the oldest family brokerage company in the UK, assists owner-managers throughout the process.

+44 (0)118 959 8224 http://evolutioncbs.co.uk

01905 23383 www.selling-business.co.uk

Mike Halls Managing director Beer Mergers

Shawn Bone Corporate finance director Cavu Corporate Finance

Planning your exit may not feel like a top priority but planning a sale early and fully is critical. It’s about being ready to sell at the optimum moment. You can’t know in advance when that may be, so planning can never start too early. Key aspects will include:

Strategy is the gel that holds the senior executive team together. It is a live, fluid concept that needs to be documented, refreshed and shared within an enterprise to provide wider meaning and clear direction. It’s vital at key times, such as in M&A transactions or a fundraising, where you want management to be able to articulate a coherent, unified message that they all believe in to a buyer or a funder. We have found that some management teams cannot articulate the strategy, have a different view about strategy, or have just not considered it important, and the first role of the adviser is to agree a common message that will be the gel for any transaction. Strategy is therefore key to any enterprise, and without it many SMEs will lack real purpose and energy holding back potential growth. A key part of pre-sale planning is to ensure the strategy is clear with the executive team, and to define the roadmap or building blocks that lie behind it. With this structure in place, a good corporate finance adviser will be able to drive real value in a sale process.

A business sale is unquestionably a significant event. For private sellers, in particular, it may be the culmination of years or even decades of work. Given its importance, a planned and proactive approach to selling a business is critical to ensuring the outcome meets or exceeds expectations. And as soon as an exit is even contemplated, some degree of exit planning should begin. Transaction strategy does not only concern the sale process itself, but also the preparation for sale, which can begin years in advance of the final transaction. Planning might, for example, involve shaping the management team to maximise your exit options – trade sale versus MBO? But even with a more pressing timetable, a carefully conceived and thoroughly executed sale strategy should add considerable value – even if “value” is not viewed exclusively in financial terms. Great outcomes rarely happen by accident. Taking advice from experienced specialist advisers, at an early stage if possible, is a sensible place to start.

0191 255 7772 www.cavucf.com

+44 (0)7973 908330 www.imperiumcf.com

• E nsuring you withdraw into an executive and strategic role, so a buyer sees the value in the business, not in you. • Carrying out basic housekeeping on all aspects, including equipment, stocks and property. There’s only one chance to make a first impression. • Ensuring all systems and procedures are robust, to give a buyer confidence in the business infrastructure. • Making sure financial information is up-to-date and transparent, to demonstrate the business worth to a buyer. • Finally, don’t forget the people – they will be the business after your exit. Most of this is common sense, but it will all take more time than you imagine, so start immediately. www.beermerger.com

Nigel Stone Partner & head of corporate Boodle Hatfield A successful exit strategy starts with planning and preparation. A management team which seeks to extract maximum value and feel rewarded for hard work needs an exit strategy. What determines the timing? Negative timing: • In a family business, where there is no succession and ageing leaders • Declining margins and difficulty of continuing • Need for capital or equity injection Positive timing: • Top of the market • Competitor needs your business and is offering an exceptional price • Owners can see better use of funds elsewhere On a practical level, ensuring that document management systems are maintained will assist a disclosure exercise in the event of a sale. Similarly, develop board structure, improve corporate governance principles and build a growth strategy for the business. +44 (0)20 7079 8140 nstone@boodlehatfield.com

Richard Buzzoni Director Watersheds

Simon MacGovern Director, Imperium Corporate Finance

The question here should be: “When should owners make an exit plan?” Management needs to stay focused on running the business. Distraction can reduce both profits and the value of the company. You’d be upset if you employed an MD to run your business but he spent his time planning how you’re going to sell your shares. The business owner’s personal objectives can get overlooked when planning. Do you want to continue to work for the business? Do you care about its continued success after it is sold? Do you worry that the highest bid will come from a competitor who would close the factory, move the trade and make staff redundant? Most advisers assume that your objective is the highest price, ignoring risk and people. For most owners there is more to it. Make sure you have a corporate finance adviser that really listens to your wishes and offers a success-only fee structure, so you know he is motivated to deliver for you. +44 (0)1604 660 511 www.watersheds.ltd.uk

Need an exit strategy? We’ll steer you in the right direction. It’s not enough to build a profitable business; you have to make sure you have a clear exit strategy. With Brown Shipley you know you’re in safe hands. As a full service Private Bank, experienced in helping people plan for exit strategies, we’ll help you understand the obstacles and keep your business in control.

Our service includes: • Finding the best structures for investments, financial planning and banking

To find out how Brown Shipley can guide you through your exit strategy please contact Hugh Titcomb, Head of Private Banking, on 0207 606 9833.

• Advising on the need to plan and prepare • Identifying potential exit routes We also work with other professional advisers to plan and implement your strategy. We’ll steer you in the right direction.

Wealth well managed LONDON | MANCHESTER | BIRMINGHAM | EDINBURGH | LEEDS Brown Shipley is a trading name of Brown, Shipley & Co Limited, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.