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GROWTO SELLUNDERSTANDING YOUR OPTIONS AS A BUSINESS OWNER

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INTRODUCTION: WHERE DO YOU GO FROM HERE?

You hear a lot of talk these days about business owners being on a ‘journey’. It’s a neat phrase, but what does it actually mean?

At BCMS we represent clients in every commercial sector, running businesses of very different sizes, and at different stages in their development. But all our clients have one thing in common: they all

have tough strategic decisions to make for the future, and need advice to help them plan their next steps.

Where are you going from here? Do you, as owner, invest more time and money to take your business to the next level? Do you seek external investment? Do you step back from the business and bring in new management? Have you taken the business as far as you want? Do you sell, and exit the business completely, to pursue new plans?

This publication is intended to help you understand your choices, and provide professional insight into the challenges involved. Uniquely, you’ll also find first-hand advice from real people who have ‘been there and done that’… former BCMS clients who have grown and sold businesses.

So, wherever you are on your journey - we hope you find it useful.

Jonathan DunnDirector, BCMS

CHECKLISTTHE FIVE SIGNS YOUR BUSINESS IS READY FOR THE NEXT LEVEL

Every company needs a clear growth strategy, but sometimes business owners are just too busy to draw up a credible, far-sighted business plan to move their business forward.

Regardless of sector, a growing business is likely to be attractive to acquirers and investors. There are signs to look for that your business is ready to take the next steps…

• YOU ARE TURNING AWAY WORK It’s a great problem to have, but, if demand for your products or services is outstripping your ability to supply them, then your business needs to take action. Otherwise, it won’t be long before potential customers start going somewhere else.

• YOUR CUSTOMERS ARE HOUSEHOLD NAMES Whatever the sector, working successfully for major organisations often creates a ‘domino effect’ of referrals and new business, which also means cross-selling opportunities. How often have your customers asked you, “I know it’s not really your area, but could you just take a look at this for me…”?

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• YOU ARE WINNING BUSINESS FROM THE BIG BOYS Once you aspired to be like them, but now you are tendering for the same work as your larger competitors, and beating them to the contract, too. Whatever you do, it’s clearly working – but, perhaps due to your size, you still find the really big jobs are just out of reach.

• YOU’RE RECRUITING MORE AND MORE STAFF Bringing in expertise in new fields – or simply expanding your existing headcount – is of course a clear sign that your company is growing fast. But it’s also an indication that your company is transforming itself from within, as a great team will bring its own ideas, contacts and methods, and that will accelerate growth, too.

• THERE AREN’T ENOUGH HOURS IN THE DAY Many business owners know exactly what to do to grow the business, but don’t have the time or cash to make it happen. One of the biggest frustrations of business owners is that they can’t justify committing the necessary resources to supercharge their company. And no-one wants a boss that keeps saying “if only…”.

“Many business owners know exactly what to do to grow the business, but don’t have

the time or cash to make it happen.“

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PLANNING FOR GROWTHQUESTIONS TO ASK YOURSELFWhen preparing for growth – and a potential subsequent sale – it is vital to look at your business objectively. A growing business needs an infrastructure that can support expansion. Here, Duncan Wade, Director, Corporate Finance at BCMS explores a few of the questions that the shareholders and management will need to ask themselves.

CORPORATE STRUCTURE Is the existing structure fit for purpose? Do the existing shareholders wish to implement a strategic plan for growth? If not, who will?

FUNDING Does the business have access to the funds required to implement an ambitious growth plan? If not, how will the business obtain such funding? Is debt or equity funding of interest? What are the expectations of potential funders or investors?

MANAGEMENTIs the current management team able to deliver such growth? If not, how will the company attract the new talent it needs? What will it cost to attract such talent? How will the company incentivise existing high performers and new recruits?

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“WE COULD HAVE PUT IN ANOTHER FIVE YEARS…”

REAL-LIFE INSIGHTS: Marc Noel, Impress Sensors – sold in 2013

“I think the main thing for us, the owners, as a group of individuals was the fact that we

did not want to take the business to the next level. It was at the point where it needed probably another five years’ investment in time and money, and another layer of staff. For us it had been a hard 10 years, a 24/7 slog. Potentially, we could have put in another five years and doubled its size, and then thought about selling. But we knew we would have to make more investment, and we didn’t necessarily have the appetite for that.

As we grew the business, we didn’t have an initial plan, but we always had one eye on selling it. We only started thinking seriously once we got the business in a good position – good contracts, strong profitability. We wanted to make sure all the shareholders would receive a decent pay out. We weren’t ruthless, but we were practical!”

PROCESSES AND PROCEDURESAre the company’s current processes and procedures robust enough to achieve the desired growth? If not, how much will it cost and how long will it take to improve them? Are there regulatory or compliance issues to consider?

GEOGRAPHICAL MARKETSWhat geographical market does the company currently operate in? Which markets would be desirable in the future? What is required to venture into new markets?

PRODUCTS AND SERVICESIs there a need for new/revised products or services? Are there any competitors that will close the gap on any advantage the company may have?

ACQUISITIONSShould you acquire to grow? Does your company have the necessary funds to make the right acquisitions? How will the company impart its culture and integrate with the new business?

TIMINGWhat are the key milestones in the growth plan? What is the timing for each stage? What happens if growth does not occur on time or as quickly as the shareholders expect.

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Most successful businesses initially experience a steep growth curve. After time, the business reaches a natural plateau – often described as a ‘comfort level’ where growth is less dramatic, and revenues may even begin to flatline.

At this point, additional investment in the business is usually required – either from the existing owner (in terms of staff and infrastructure) or via a new external partner.

CASE STUDY: NURSE PLUS – GOING TO THE NEXT LEVELAdvised by BCMS, healthcare staffing solution provider Nurse Plus secured significant investment from Private Equity organisation Key Capital Partners. From there, this growing business went from strength to strength…

BUSINESS BACKGROUND↗ Founded in 2005 and headquartered in Canterbury, Nurse Plus provides staffing solutions for the healthcare and domiciliary care sector↗ The major shareholders were looking to retire, while the management team were keen for an opportunity to grow the business↗ Nurse Plus boasted a strong track record of growth - around 28% per annum↗ The company selected BCMS as lead advisor following a previous unsuccessful attempt to sell the business by a healthcare sector specialist

TRANSACTION SUMMARY↗ BCMS attracted considerable interest from trade and private equity buyers↗ The sale price achieved for the business was significant ↗ Additional value was generated via loan notes and 50% retained equity in the new company

GROW AND BUILD: THE OUTCOME↗ Following the acquisition, Key Capital Partners (KCP) invested in expanding the business, opening 10 further branches↗ This increased the employee base from 50 to 175 people, and turnover to £40m↗ In 2½ years, KCP generated an exceptional 5x return on their original investment↗ KCP sold the business to Sovereign Capital for in excess of £50m↗ The original shareholders and management team shared in this significant uplift

WHERE ARE YOU ON THE BUSINESS LIFECYCLE?

Investment

Growth

Time

Growing a business

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FUTURE PROOFING: EMPOWERING YOUR MANAGEMENT

A growing business needs a capable professional management team to take the business forward. Shareholders should ideally look to delegate day-to-day operational responsibilities to ensure that the company’s future is not reliant on its owners.

If you are growing to sell, it is important to consider what incentive the management team has to deliver the company’s growth plan, and whether there is a need to acquire additional skills by attracting new talent. Unless there is a Management Buy-out on the horizon, a company may wish to consider implementing a bonus structure or providing another incentive to help attract and retain talented people.

This could involve Enterprise Management Incentive (EMI) and share incentive schemes, whereby the company provides a tax-efficient way for senior key employees to buy in to the company on the fulfilment of certain criteria.

Often EMI schemes are structured so that, when a company is sold, employee options holders are able to exercise their options prior to the sale and realise value. Ensuring that the company has adequate scheme rules, options agreements and the right provisions in its articles of association are crucial, as the beneficial tax treatment afforded to those holding options under an EMI scheme can be withdrawn if the documents are not structured in the correct way.

FUTURE PROOFING: NAILING DOWN PROCESSES AND PROCEDURES

Non-compliance with current relevant regulation can be extremely costly. Compliance with legislation will be an in-depth area of focus should the company wish to obtain equity funding to grow and on any future exit.

Breaches of legislation can be deal-breakers, and often lead to additional coverage required by a bank or buyer in the form of indemnities, a reduction in the amount of equity funding provided or the purchase price offered or worse still, the withdrawal of an offer to fund or purchase the business. Obtaining advice on the company’s obligations from the start is critical in order to avoid future issues arising when they are least welcome.

Growing a business

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“RUNNING SUCH A LARGE BUSINESS WAS BEYOND OUR COMFORT ZONE”

REAL-LIFE INSIGHTS: Gary and Carol Brown, Rainbow Dust Colours – sold in 2015

“We saw a gap in the market to manufacture and supply our own range of quality edible

food glitters and associated products. We knew if we didn’t do it, someone else would. We literally started with a load of little pots and 70 colours of glitter in a small room at the cake shop. It grew rapidly; we moved to bigger premises and started to employ people. We wouldn’t call ourselves entrepreneurs, but we loved starting the business, developing the products and growing the business to the point where it was ready for sale.

In 2012, we started thinking about the future of the company. It had grown enormously; turnover had reached £3.5m, we employed 30 people and the product portfolio was complete. We felt that running such a strong business was getting beyond our comfort zone, and we both decided that in order for the business to continue to grow, it needed to be part of a much bigger operation.”

FUTURE PROOFING: EXPANDING INTO NEW TERRITORIES

Breaking into a new geographical market can be difficult for any business. As well as the commercial considerations – in terms of identifying the best markets, and developing a workable strategy, expanding overseas can have wide-ranging and complex legal, financial and tax implications.

It is critical that any overseas entities are set up in the most tax-efficient way in order to reduce the risk of unwelcome surprises going forward. To be in the best possible position, the company’s UK legal, tax and financial advisors should work with legal, tax and financial advisors in the local territory to implement a robust structure that works for all.

When it comes to a company sale, value will be placed on a company’s customers and its geographical footprint, which could be highly sought-after by any future acquirer wishing to break into new markets.

FUTURE PROOFING: DEFINING NEW PRODUCTS AND SERVICES

It is imperative that the company has all of the rights it needs behind its products. One of the key legal issues regularly discovered in any due diligence investigation, particularly with regard to growth and fast growth companies, relates to the ownership of intellectual property rights (IP). If the company has used a third party developer or consultant, the company may not own the intellectual property rights in its products. Often companies in such a position then have to enter into negotiations to pay the developer a sum to assign the rights in all past and future work to the company.

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WHY SELLERS SELL

Keen to work with new investors/acquirer: 10%

Red tape (entrepreneur vs manager): 6%

Timing/grown for sale/realise investment: 17%

Other business interests/opportunities: 12%

Other: 4%

Retirement: 25%

Lifestyle/family: 26%

For owners of private companies, selling their business is often a once in a lifetime event and, as this chart and accompanying commentary from business owners illustrate, is frequently entwined with family and emotional issues as well as commercial and financial matters.

From a commercial point of view, business owners need to explore a range of deal options, and assess potential acquirers or investors in terms of cultural fit, strategy, and commercial viability. From a legal point of view, a full analysis of any deal structure is vital in order to structure the proposed transaction to maximise the price that is to be paid and minimise tax and other liabilities. Good professional advice and planning is essential to achieve all of these aims.

Source: BCMS

MAKING YOUR EXIT

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MY REASONS FOR SALE

The following are statements given to BCMS in 2016/17, from business owners choosing to seek a sale:

“The shareholders both feel that the business and staff would prosper under a larger company; the business has grown to such a size that it has exhausted the directors’ capabilities.”

“To move it forward would mean investment in staff and equipment, which the shareholders do not want the responsibility of managing.”

“I now have reduced appetite for risk and am seeking improved work-life balance. I also have another business to run.”

“The shareholders would like the company to achieve its next stage of growth. They understand that for the business to evolve, external input is required.”

“AS A BUSINESS OWNER, YOU JUST GET A FEELING…”REAL-LIFE INSIGHTS: Winston Lee, Nyquist Solutions – sold in 2016

“Life as a business owner had become quite stressful. I’m terrible at managing conflict. It was difficult to handle people as employees rather than as colleagues. I didn’t want to become a disciplinarian, it didn’t sit well with me. So that had an adverse effect on the business, and it was obvious that I needed to do something.

I thought about bringing in management, but there are all the issues of salary. We had a product that had helped us become the market leaders in a certain area, and I just thought that it was a good time to find someone to buy that technology. But you know, as a business owner, you just get a feeling. It was time.”

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YOUR EXIT ROUTES: UNDERSTANDING DEAL TYPESEach method of exit has its pros and cons. Much will depend upon the size and market positioning of the company, the strength of second-tier management, and how much the major shareholders want to be involved post-exit, as Duncan Wade, Director, Corporate Finance at BCMS explains.

FULL SALE TO A THIRD PARTY OR TRADE BUYER

This can be a sale of shares by the company’s shareholders or a sale by the company of its business and assets. A full sale will often allow the sellers to retire or start a new venture, while hopefully seeing the company flourish under new ownership.

PARTIAL SALE TO A THIRD PARTY OR TRADE BUYER

This takes the form of a sale of either a majority or minority shareholding in a company to a third party. This allows for the shareholders to realise some of their investment, while gaining some useful input and additional skills to take the business forward.

VENDOR-BACKED MANAGEMENT BUY-OUT (MBO)

The senior management team buy the shareholders out and this usually takes the form of a share sale. Often there are questions as to whether the management team can finance such a transaction, but

such issues can often be dealt with by utilising a variety of funding sources, including a vendor loan.

PRIVATE EQUITY-BACKED MBO

In this scenario, a Private Equity house provides the funding to support the acquisition of a company from the existing shareholders by the existing senior management team. After the transaction, the PE house will generally control a majority equity stake in the business, but will look to incentivise the existing senior management team with “sweet equity”. In this way the existing senior management team receive a material equity stake in the business, for a very small personal investment.

MANAGEMENT BUY-IN (MBI)

This is where a senior manager or management team from outside of an organisation buys into a company and takes over as the new management team. A Buy-in Management Buy-out (BIMBO) is a hybrid of a Management Buy-in and Management Buy-out, where a number of managers from outside of an organisation buy into a business alongside members of existing management to form a new management team.

INITIAL PUBLIC OFFERING (IPO)

This option typically involves offering shares in a company to the public, either on the Alternative Investment Market (“AIM”) or as a full listing on the Stock Exchange. Usually the internal processes and the management of the company do not change, but the IPO process is very expensive and founders’ equity is generally locked in for an extended period so a full exit may take a number of years.

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“GET SOMEONE INDEPENDENT ON-SIDE”

REAL-LIFE INSIGHTS: Sam Pemberton, Softel – sold in 2013

“It was very important for us to have a party in between us and the acquirer. I have friends who have tried and failed to sell businesses themselves. You feel very attached to your

business and to have someone relatively independent on-side, who can get out there and set up meetings and liaise with buyers, is very useful.

“That side of things was managed very well, particularly the meetings with potential buyers, which went very well both in the UK and in the USA. It was great to have someone in the room who understood where acquirers were coming from. We are not accountants, and what we found was that the BCMS team was able to anticipate the questions they would be asked. While we had nothing to hide, it was nonetheless useful to put our message across in a particular way.”

FINDING THE RIGHT BUYER FOR YOU

It takes time, resource and expertise to find the right buyer. While the most obvious acquirer may be a larger regional competitor, or a larger trading company in your sector, the best buyer in terms of cultural fit and deal terms may be totally unknown to you: located overseas, or in a different geographical region, or in a different sector. Equally, that buyer may be closer to home, for example your management team, or a supplier or key customer you know well.

The key to finding the right acquirer or investor is approaching a number of parties, and creating a competitive environment. That means actively engaging with a number of potential acquirers. As the table on p27 shows, whatever the sector, approaching a wide variety of acquirers creates a competitive bidding process. It also encourages uplift from the lowest to highest offer, often from the same bidder. Negotiating with just one buyer means it is a one-horse race.

Confidentiality is key here, so details of any potential sale are kept from customers, staff and the wider marketplace. Any interested party must be fully profiled and secured under a robust, legally binding Non Disclosure Agreement (NDA) before any negotiations begin. Any acquirer is likely to be advised by a specialist acquisitions advisor; likewise anyone looking to sell should always engage professional representation.

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HOW COMPETITION DRIVES DEAL VALUE

Deal statistics from selected recent BCMS-led transactions

Sector # of parties approached

# of seriously interested

parties*

# of face-to-face

meetings

Lowest offer

tabled

Highest offer

tabled

Offer uplift

Engineering 228 84 19 £4m £11m £7m

Technology 128 26 7 £5.1m £9.3m £4.2m

Construction 135 33 5 £30m £34.7m £4.7m

Consumer 194 22 4 £6.6m £10m £3.4m

Distribution 150 41 13 £5.5m £11.5m £6m

*Parties signing a Non Disclosure Agreement. Source for data: BCMS

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WHERE DID YOUR ACQUIRER COME FROM?

Former BCMS clients explain the importance of researching a wide variety of buyers

“Our research list was really eye-opening. It was so much wider and went into so many different industries – companies it hadn’t even crossed our minds would be interested in acquiring us.” Alisa Miller, PCM Healthcare

“Our business was very specific, but we were bought by people we would never have dreamt of. It was the perfect match in the end. We were two people running a business that had grown – BCMS found us two people who wanted to run a business and identified with the ethos we’d created.” Fran Henson, Bishopstrow College

“We were quite blinkered, thinking we were going to sell to a like-minded company. BCMS took those blinkers off and looked at companies that might see ours as an additional line of business to complement what they were doing.” Paul Cole, Personal Homefinders

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“YOU’VE GOT TO HAVE MORE THAN ONE BUYER…”

REAL-LIFE INSIGHTS: Andrew Sesemann, Cox Agri – sold in 2014

“You’ve got to get someone else in the frame, not just the buyer who has made an offer.

You’ve got to get competition, because you just don’t know what else is out there.

The crucial factor – and this came up in my first company sale with BCMS – is that I was told there was a good chance I could sell to a company I had never heard of. In an industry like ours, I thought that was impossible. I thought that was marketing speak. And yet I did. In that first sale, I would never have approached the company that finally bought me. They wanted to get into London, and I was a specialist in the London area – there was a clear fit.

Every industry is different, of course. I have sold in two areas now: agricultural products and healthcare products. In both sales, getting a competitive environment was so important.”

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“WE NEVER BELIEVED WE COULD BUILD SOMETHING SOMEONE ELSE WOULD PAY FOR…”

REAL-LIFE INSIGHTS: Robert Spenceley, South Lincs Foodservice – sold in 2012

“How did I feel when I sold? At that precise moment, extremely proud. When we originally

started on the journey, we never really believed that we’d be able to build something that somebody else would want to pay for.

No matter how big our business got, it still didn’t feel any bigger. It felt like a family business and it felt like there was still more to achieve. Post-sale, I’ve predominantly become involved in property development. I’ve got three different businesses: one is on my own; one is with two friends of mine; another is with a business partner who does the building work for the other two companies. It’s still too early to do nothing!

My advice to business owners is take your time. If you’re in a fortunate enough position to be able to plan selling your business, don’t rush. A business needs to be prepared for sale. It really is a case of being able to present yourself as professionally as possible. You will get more for your business, the cleaner the business is.”

Selling a business

FUTURE PROOFING: GET YOUR HOUSE IN ORDER

A ‘clean’ business is an attractive proposition to a buyer, and transparency is a key factor. Any potential sale will require you as owner to have access to an array of documentation to hand, as your acquirer’s legal teams and advisors lift the lid on your business. This includes (but is not limited to):

corporate structure and organisation

financial information – statutory and

management accounts

asset lists/lease arrangements

employment contracts and details of benefits

business, contracts and trading information

insurance and tax arrangements

property – leases and/or details of ownership

litigation and dispute information

intellectual property records

computer systems, data and IT

pensions or other liabilities

regulation and compliance

documentation

It is important to remember that exits are all different – their structure, their commercial terms, the time they take to complete and the amount of effort required to get them across the line.

What makes the difference in a deal process is good planning and preparation. Having experienced professional advisors on board as early as possible to manage the process, the documentation and the people involved is crucial. The ability to project manage the transaction, spot potential problems early on and solve them is where good professional advisors can really bring value.

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© BCMS 2017 Reproduction in whole or part without written permission is strictly prohibited. Whilst every care has been taken during the preparation of this publication, BCMS cannot be held responsible for the accuracy of the information herein or for any consequence arising from it. Opinions expressed do not necessarily reflect BCMS policies. The information published here is intended to be for general information only and should not be used as the basis for divestment decisions. BCMS, its staff and contributors do not accept any liability for any loss suffered by readers as a result of decisions made purely on the basis of the contents of this publication. Professional advice should be taken in relation to all divestment decisions. BCMS is a trading style of BCMS Corporate Limited. BCMS Corporate Ltd is authorised and regulated by the Financial Conduct Authority, FRN 741716.

Publication date: Spring 2017

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