Article - Time for A Sharp Exit! Options to Get Out of Your Business!
READ: 15 mins
AUTHOR: Robert Craven
Very few agencies will ever get to a ‘successful’ exit
Most agencies have not thought through how they will get to their mythical exit
So… the agency has been going for a couple of years and it’s all been going quite nicely… you have been making tidy profits… you’re taking home a decent whack… but where to next?
Most agencies talk around the exit topic, but few have the grown-up conversation. Many talk about making their money on exit, but how many? The answer is very few. Very few indeed.
Some 70% of business owners hope to sell their business on retirement yet only 25% have plans in place to do so!
The dream of taking the agency from the kitchen table to the full sale in 5 years happens to precious few. In the same way that precious few people who dream of playing for England ever do so. And if they do, it wasn’t quite what they thought it was going to be.
They haven’t looked at the stats. They haven’t looked at the odds and get blinded by the 1 in a 1,000 or 1 in a 100,000 or is it 1 in 1,000,000 that get to a profitable and happy exit.*
And then there are the unanswered questions that swim around in the endless exit debates feeding the dreams and greed of the uninitiated:
How much is the agency worth? How is it valued? What multiplier might be applied to what?
What is it that people are buying?
What are the common negotiation tactics?
What might a canny ‘other side’ do?
When is the best time to sell?
What does Due Diligence really mean?
How can we increase the value at sale?
What will they do to reduce the value at sale?
How long will it take?
How much of my time will it take?
What will the impact be on the business in the years of negotiation and sale?
How much will it cost (professional fees and internal costs, and loss of sales while we take the eye of the ball)?
What do people really buy?
Should I recruit a trade sale broker or an M&A expert or go for the DIY option?
What are the real tax implications of sale and how might they be mitigated?
What agreements and contracts need to be signed?
If you are looking to exit, several options appear in a rough order of ease:
Bleed the agency dry
Liquidate
Friendly sale
Trade sale
Management buy-out/buy-in
Business angels
Venture capital
Go to market/IPO
Organic growth or ‘buy and build’ or agglomeration… then any of the options above.
The first two options are straightforward.
OPTION 1:
BLEED THE agency DRY
Pretty straightforward this one – you just take as much as you can out of the business in the form of pay, dividends and perks irrespective of the performance of the business – not the sensible option and often the option people follow unconsciously… Right now, many are taking Government money, cheap and guaranteed Bounce Back and CBILS loans, and abusing them for personal gain in the knowledge that the business will close.
OPTION 2:
LIQUIDATE
This option may come at the end of Option 1… quite simply, you just close the doors, shut up shop and wait for the liquidator or insolvency practitioner or bankruptcy courts to catch up with you. You leave them to sort out the outstanding debt and sort out the remaining creditors and if there’s anything left (after professional fees) then the shareholders get some money. Not the cleverest option and one that, again, some people do without any clear, conscious decision to do so. (Some do it semiconsciously, using the old Bounce Back and CBILS loans trick)
OPTION 3:
FRIENDLY SALE
The idea behind the ‘friendly sale’ is that this takes place with everyone being happy. Someone nearby, employees (MBO) or friends or family don’t want to see the business disappear and take it over rather than see it sold. This is a great option but not predictable; often these sales do not see the highest valuation for the business because it is not a purely mercenary purchase but on the other hand, the business gets passed on to a friendly face! These sales may have the minimum of professional advisor ‘interference’. Often these sales are set in motion quite early on as an owner gets a hunch that there may be a private deal to be done.
OPTION 4:
TRADE SALE
Selling the business to the open market requires there being one buyer out there who wants to buy a business like yours. Usually they will be buying to get into a new market or access to customers, but it may be to acquire your technology, your goodwill or your market share.
Trade sales tend to get you a better price when it is not known that you wish to sell but each deal is different! Ideally you would set your business up to look attractive to the purchaser so you should think carefully and a long time in advance about what a buyer might wish to buy (a management team or ideal client list) and create a business to reflect that.
It is at this stage that you can get a mergers and acquisitions professional to help you present the agency in the best light and to negotiate the best deals on your behalf.
OPTION 5:
MANAGEMENT BUY-OUT/BUY-IN
Your management or another management might wish to buy your business. MBOs are attractive to the existing management because they know the business already, warts and all. A similar set of guidelines applies to selling the business to MBOs, MBIs and the other sensible options below (whether selling the business or looking for funding).
OPTION 6:
BUSINESS ANGELS – A FUNDING OPTION
Business angels bring funding (£50,000-£1m?) and their own experience to your business to help you grow it. The stereotypical Business Angel has been there and done it and has some capital to play with. They usually wish to join the board and can give you the experience and the money that you need to take the business to the next stage of growth.
OPTION 7:
VENTURE CAPITAL – ANOTHER FUNDING OPTION
Venture Capital, sometimes referred to as ‘Vulture Capital’, is not for the faint-hearted. Deals normally start at about £1m and the VC looks to see higher than average returns on their investment, say 30+% pa. VCs are professional business growers and only invest in businesses that can generate the returns that they seek.
OPTION 8:
GO TO MARKET/IPO
Going to market is sometimes referred to as IPO (the Initial Public Offering, in effect a prospectus offering shares in a business for sale). There are three markets to consider, in order of ascendancy: Ofex, AIM/NASDAQ and the full Stock Market quotation. In very general terms, Ofex is a smaller, independent market for funding up to £5m, AIM looks at £1m+ and the Stock Market is for £10m+.
The cost of each option increases with professional fees associated with each option. Look out for these costs – there is an entire industry out there that makes its money out of the business of buying, selling and funding businesses. Due diligence is the least of your potential costs (lawyers, accountants, promotion, PR and so forth) with total fees often in excess of 5% of the amount sought – and don’t forget that each exercise might take a minimum of six months of director(s’) time.
OPTION 9:
ORGANIC GROWTH OR ‘BUY AND BUILD’ or agglomeration... THEN ANY OF THE OPTIONS ABOVE
Rather than get money to grow, you can try to grow organically. The problem here is that business growth means that you are haemorrhaging cash and you need something to supply the cash. ‘Buy and Build’ is an excellent fast-track route to growth but needs even more cash to fund it.
Whichever of the sensible options above you wish to take (excluding options one and two) requires a special business – otherwise it will hold no attraction to a potential buyer or funder. Whatever your direction, it seems sensible to run an agency that adheres to some core principles.
CORE PRINCIPLES OF AN attractive business for selling
Attractive businesses for selling are different from their counterparts, the life-style businesses. They are more aggressive, more business-like and more systematic and structured in their approach to growth. They buy-in competence when they need it and they have ambitious goals and usually achieve them. Fundamental attributes that the business must exhibit to be attractive to a buyer or funder should include:
Underlying, repeatable, sustainable profits
Reference and trophy clients
Distinctive capabilities – things that make you unique
Core competences or strategic assets – what you are really good at
A senior team to take it to the next stage.
UNDERLYING, REPEATABLE, SUSTAINABLE PROFITS
Anyone interested in your business will want to see underlying, repeatable, sustainable profits. Who wouldn’t? You need to be able to demonstrate beyond doubt that your business has, can and will deliver long-term profits. Here we presuppose there is some evidence that the right market conditions will continue to prevail.
REFERENCE AND TROPHY CLIENTS
As well as the guaranteed profit stream, your business should also be able to demonstrate, conclusively, that you have some reference clients (people that the buyers/funders can speak to) and, more importantly, some trophy clients (proof that your product works because one/some of the key players in your market place believe in your product or service).
DISTINCTIVE CAPABILITIES – THINGS THAT MAKE YOU UNIQUE
More business school fancy terms that refer to uniqueness. The unique skill set that you have (intangible assets) is one part of the equation… another would be Intellectual Property, ideally a protected, defendable IP for something that is in high demand, which gives you a unique position and advantage in the market.
CORE COMPETENCES OR STRATEGIC ASSETS – WHAT YOU ARE REALLY GOOD AT
These are fancy business school terms that refer to your core skills, what you are good at.
A SENIOR TEAM TO TAKE IT TO THE NEXT STAGE
Has your senior team got the right people in place for the next stage of growth or have you still got some left-over fellow-travellers who don’t really deserve their seat in the board room for any other reason than long service (or their family name)? Through the eyes of the buyer/funder, do all your board members still add real value to the business? Can the business continue to flourish without the current owner(s)?
So which is it:
Time for a sharp exit – you need time for your exit strategy to kick-in?
Time for a sharp exit - you need to plan the timing of your exit?
Time for a sharp exit – your exit needs to be swift?
Time for a sharp exit – you need to start thinking about how you are going to exit the business…?
The advert runs 'Time for a swift exit - time for a cool, sharp Harp'! For me, I am going to imagine what it would look like if Carlsberg ran your agency.
* Back of envelope figures – quick and dirty
50,000(?) agencies (excluding start-ups) in UK. Churn/Exit rate, say 15%. Typically, 5% close gracefully (2,500), 5% close disgracefully, 5% exit.
[30,000(?) new agencies/start-ups each year; 90% close within 3 years or 3,000 added to the stock after 3 years].
Number of agencies talking about a financially successful exit at some point: 50%(?) (25,000).
Number of financially ‘successful’ exits pa: 500(?) which is 2% of those talking about it, or 1% of existing agencies.
The rule-of-thumb churn and survival rates are based on Prof DJ Storey at Warwick Business School, The Small Business Sector and subsequent materials.