Director general, IoD
Chairman, Baxter Freight
CEO, Newbery Cricket
Managing director, Fenton Capital
Chairman, By Design Group
Chairman, Cambridge Business Improvement District
Director, Bright Interactive
SIMON WALKER Good morning and thank you all for coming. This is an Institute of Directors roundtable where we’re going to look at one of the less talked about aspects of business – exit strategy. I read quite a sobering statistic the other day: the average life expectancy of a publicly listed company in this country is about 15 years, that’s how long bigger companies are likely to have been around before they’re bought up, merge with someone else, or fail.
Unsurprisingly, that number has fallen quite fast over the last few years. At the end of the Second World War, companies were expected to live as long as the people who worked for them. These days, companies are lucky to make it to adulthood.
Although big businesses might be living shorter lives, they’re certainly making the most of them. In the last five years Apple and Google have bought 150 other businesses between them. But deal-making isn’t just something that’s for big companies. This M&A activity is having an impact right through the supply chain and through smaller businesses and start-ups around the world.
Many business owners will understandably be focused on the immediate issues of survival and growth, but deciding how to exit your business could be one of the most critical business decisions you ever take. Balancing competing interests, making sure you get the best deal, stepping back from a business that you’ve helped create – those are actually very difficult decisions that need to be planned with great care.
I’m delighted that the IoD is hosting this event today and look forward to hearing your thoughts on exit strategy. But before that I’d like to hand over to Kevin Uphill, the chairman of Avondale…
KEVIN UPHILL Thank you Simon. The market is very acquisitive at the moment and lots of people are looking at buying companies as a route to growing shareholder value. I think this is predominantly because we’re seeing that, whilst we’ve got some economic growth, it’s slower than pre-crash – so people are really focused on buying companies as a route to delivering their own shareholder value.
But people are a lot fussier, acquirers are very focused. Previously it was about creating volume, pulling together turnover, and profit. Increasingly, it’s about strategy, in looking at companies from a perspective of what new products, strategic alliances, acquisitions and intellectual property fit where their weaknesses are.
I think that changes the perspective in terms of people considering selling. Particularly as they are much more cautious – so, for example, one of the things that we’re seeing is the due diligence arena is significantly more detailed than it was pre-crash, and most of the companies that we’re dealing with are just not prepared for coping with that.
The other area is reducing dependency on the owners – it’s a key arena and an awful lot of people struggle with that. They’re too hands on, buyers sense it, they see a lack of sustainability in the business and, consequently, if a deal can be done, it’s done at a lower price…
So I think the bottom line is: lots of energy and wealth being created in buying and selling companies, but not enough time being spent preparing and looking at actually how you unlock that shareholder value earlier. Does anyone else have any thoughts around this?
IAN BAXTER I completely agree with you. I came to it late in working it out, but I believe businesses should start thinking about exit on the day they’re created. Because, ultimately, the value in the business can only translate into real money when it is eventually sold – so, unless it’s going to be a public listed company, that may or may not go on forever.
One of the reasons my business was sold [Baxter sold freight firm RH Group in 2011, before setting up Baxter Freight two years later] was we realised we’d become a market leader in the thing that we did, and most of our opportunity was to diversify within our sector. When we analysed that, we realised that diversification made us less attractive as an acquisition target, and would actually complicate that process, so we came to a full stop and decided we couldn’t do that.
What we’d also done was created a management team that was capable of running the business, so therefore – for the owners – we were less hands-on. And then along came a buyer. We didn’t plan to sell, but actually the pieces fell in together and they made us a nice offer. Because we had alternatives, we weren’t rushed.
UPHILL It’s a really good point, the alternative, because quite a few sellers have come to us saying, ‘we’re tired, we’ve run out of steam, we don’t know what to do’. That’s the worst position to go
to market. The best position to go to market is when you’ve got a really clear vision of where the business can go, and you’re able to present to buyers how you can go past that and the team are going to drive that. It gives you an alternative if you’ve got a clear next-step vision for the business.
GEOFF PARSONS When you’re truly entrepreneurial and you’re looking at opportunities in different ways, I think it’s very hard to see the exit. Now, with 18 years of experience, I should have started all my businesses with the exit in mind and I would do now. But it’s very difficult when you’re starting a business and you’re passionate about developing something. Certain sectors do lend themselves better to starting with an exit in mind. Investors are going into AIM-listed mining companies and oil companies with risk in mind, the same in hi-tech businesses. So I think it’s horses for courses and everybody develops differently.
MARTIN WILSON I used to think it wasn’t healthy to have an exit strategy and certainly when we started our business we were very passionate about what we do, in keeping with most people who start businesses. So our thoughts were always ‘why do we want to exit this business? We’re really enjoying the work, we want to build a sustainable business and that should be our priority…’ So from the start our objective was to have a business that focused on real customer value, our team, and growing that team and the environment that we operate in.
I have changed my view on that having spent years growing a company up to a point where micro-managing and controlling everything is not scalable. For the last year or two we’ve been restructuring our business into self-managed teams – to harness the intellectual creativity of every employee, not just managers. A side-effect of this has been that now I feel I could easily make myself redundant at some point.
Clearly it’s not too late for us, we’re doing it now and it’s working. My objective right now is to have a sustainable and scalable structure to the company where I’m just another person who can add some value… Now I only work three and a half days a week and I may reduce that further in the future. But I guess if I’d started out thinking that, I possibly would have lost the passion for what I was doing.
WALKER Gordon, presumably the business you run you could only create because you’re passionate about what it does…
GORDON LEE Yes, that’s very much at the heart of what we do. We’re passionate about cricket and the shareholders love cricket, and that’s probably why they’re involved in it… What we’re very good at is a niche within our business: we make English handmade bats. Now, logic would say that you need to grow that business and diversify. But actually, if we’re looking to an exit, we’re more interesting just being very good at our niche because that’s not what our competitors do and therefore they might want to buy us. All the time we chase their share, and take their share – if they were to buy us, that’s not what they’re buying us for. They’re buying us for our speciality, and that’s a very different perspective, I think.
UPHILL It’s an interesting question, because you’ve got the argument of scale – if you diversify then you’re bigger. And bigger profits mean a bigger multiple invariably – because people with deep pockets are looking for slightly larger businesses. The financial equation today is ideally you want to have a business with more than £300,000 to £400,000 profit, run by staff. When you’re lower than that it starts to get very difficult to try and sell it, so that’s the wrestle. But owning a niche is critical.
LEE But as a small business there’s that step – you’ve got to make that investment that means for one or two years you’re not profitable while you invest in a bigger warehouse, in more support, bigger systems. And then you can chase your sales and end up with a profit that’s actually not an awful lot different from where you were before when you had a very successful little niche. You need the support to decide whether it’s worth making that step and chasing that growth, or sticking with what you’re doing.
EUGENE MASLOV Diversification would give you the growth that we talked about, but there needs to be a strategic fit. In other words, just going for another product line, if it’s not really related to the core business, isn’t going to be the winning strategy. Thinking about the way the business world has evolved, there was a fad for conglomerates back in the Sixties, and bankers were putting unrelated businesses together thinking it was the next best thing. But then the whole fad reversed and bankers were busy again dismantling these conglomerates, because ultimately investors like companies that are leaders in their specific market niches. If investors want to have an exposure to a company that manufactures bats, it will be more efficient for them to simply buy shares in that company rather than have an unrelated business they already own go through the expensive process of acquiring that bat manufacturer. So the strategic fit issue is massively important.
IAN SANDISON I’d like to understand where the people fit is in all this – because if you get bought out, but the business wants to move somewhere else physically, your bat-makers may move on and therefore the buyer’s lost the value in the business. How much value would a buyer see in the fact you’ve got a self-managing team? How important is that people fit and is there enough due diligence done in terms of human capital and the talents of the organisation?
UPHILL I think people became far more important after the crash – [buyers] are doing cultural due diligence and due diligence on customer relationships, which are, again, about the people, not just financial and legal aspects. Invariably. the key word is sustainability – you’re looking for an existing management team that has a track record of growing the business, not just managing it, but also being able to deliver change initiatives… Interestingly, we’re doing more transactions where the sellers are actually staying – that’s quite a new trend.
BAXTER I think what was really important as a selling feature of our business was the diversification of control of that business. Not just in management but in terms of the relationships we have with customers. For example, it wasn’t me that had all those relationships – we had something like 150 account managers who would interface with customers. So what we were selling was something that was designed to be very sustainable post-sale.
PARSONS The other thing I’d comment on is [starting a business with an exit in mind] is a bit British. I’m sure the guys running Google and Facebook weren’t starting off with the exit in mind, they wanted global domination… I think we have a tendency to sell out as soon as we’ve got £10m in the bank and we’re cosy – let’s get the hell out of here! Whereas if you’re sitting in Silicon Valley, you’re saying ‘well, actually I’ve got the first £10m; how do I get the first £10bn?’
WALKER This is really interesting. We’ve got a group in the IoD called the IoD 99 – young people, often under 25. I spoke to them last week. They all have great ideas, often one idea that this person believes is going to make a fortune. What’s the thought for them? Because a lot of them aren’t going to be serial entrepreneurs, like some of the people round this table, but they’re people with one great idea that possibly revolves around themselves. Do they write off this area or is it something they should still think about?
UPHILL Martin was mentioning it earlier, you know, ‘we started out thinking about profit and then we’ve actually flipped and said we still need to look at shareholder value’. But when you listen, he was still talking about doing both – and I think that’s the critical bit. Preparing a company for sale should not be grooming it or house doctoring it – creating shareholder value is just a fundamental part of the boardroom discussion, it’s best business practice anyway. You don’t have to take the exit, it’s ok to stay at a business and keep going. So I think those young people who are doing it, so long as they’re successful and contributing to the economy, whether they get to £1m or £10m, it’s about doing their best, and at least creating the choice of this discussion.
WILSON What we’re interested in at Bright Interactive is that there aren’t really that many true innovators, and what’s important instead is the processes you go by in order to make an idea work, or to see whether it’s going to fail early and whether you can pivot that idea into something that will work.
What’s interesting to me is – is it possible through learning best practice, and experience, to just come up with a company that, through purely doing the right things, is able to come up with successful products? In other words, talking to customers about the problems that they have, instead of thinking ‘right, I’ve got this great idea that I’m just going to go ahead and build, which possibly there’s a need for, and maybe it’ll be Facebook, maybe it won’t’. I think that changes the game a little bit for entrepreneurs. If you’re talking about entrepreneurs who are just starting, then if they’re not following a lean start-up approach, 99 per cent of them will probably fail.
WALKER Returning to Geoff’s point, what is it about Britain [and attitudes to exit versus those in the US]?
MASLOV There is clearly a cultural dimension here and I have some appreciation for it because I’d lived in America for seven years prior to moving to the UK six years ago. It’s the America/Europe divide in that, for better or worse, Americans are more aggressive – I know I’m using a cliché here – and the invisible hand of capitalism, as Adam Smith put it, pushes them further along in going for bigger market share, greater market domination. Peter Thiel, one of the PayPal founders and early investors in Facebook, wrote in his recent book, for instance, that having a monopoly is a good thing for a business – which is a counter-intuitive idea because we all tend to think from a consumer perspective. Americans are not ashamed at having this great ambition at market domination, and the Silicon Valley-type culture of making a business into a $1bn (£651m) company, and then a $10bn company, is clearly there.
SANDISON There’s a constant debate in Cambridge about how we can get businesses through that £10m, £20m, £30m turnover, up to £100m £150m £200m. Because there’s an awful lot of pressure – do you hold and build, or do you sell? If you’re an entrepreneur and you’ve been two years in your business and haven’t taken much money out as a salary and you’ve got some investors behind you and a good offer comes along – there’s a good chance you’re going to take that offer because you want to realise the value you’ve got on the business, and your investors want to realise that value.
I see where we’re developing an entrepreneurial culture, which is great… but there’s this management gap I see which is in the middle. Who’s running those £50m, £100m, £150m businesses? Where are we developing that competence? If it’s all about starting a business and selling it, that’s fine – but how do we take those people on to run a business with 500 employees, 1,000 employees, and where are we developing those corporate leaders of the future? I see that as a challenge.
WALKER Can I ask who you’ve all relied on for advice?
WILSON For the first 10 years, I’d say from nobody. But I now look back with some regret, because I’ve spent an awful lot of time – since I’ve had a lot of time on my hands, through the self-managed teams – reading books and so I would say books are the answer now. I wish I’d done more learning of best practice 15 years ago because there’s not that many problems that someone hasn’t attempted to solve in the world out there.
There’s a lot of good best practice out there that [you can miss out on] if you’re not careful when you’re starting a business, you’ve just got your head down, doing your day-to-day work, talking to the clients, making it work… I’ve spoken to more people, read books on it. I think you could be in a better place than if you try and solve all the problems yourself.
PARSONS I think good advice is incredibly hard to find. You’re generally out there seeking advice because you’re in unknown territory. And after 18 years you become an overnight success at judging people, but you’ve got to get that feel of finding high-quality people – you look for track-records, you look for recommendations, but even right now, as I sit here, I would still say it’s incredibly difficult finding really top class people who can deal with you at your level in the way you want to be dealt with, and lead you through a pathway.
LEE But Geoff, I think that’s the role of the IoD. I think facilitating this is really important because you’re right, it’s very hard, and meetings like this are very useful. I think it’s the responsibility of the people like the IoD to bring more of us together to share that information – because we’ve got the experience, in amongst the members, to do more of that.
WALKER That’s one of the reasons we’re focusing so hard on younger people, because we’ve got a lot of older, experienced people who’ve made it – getting those ideas through to people who are just starting, often who don’t know anything about how to run a company, is hugely important.
BAXTER I think the question is, what do you rely on advisers for? I’ve been close to a law firm, I’ve been close to an audit firm – and those people are excellent people, I have good relationships with them. But they didn’t determine the way [the sale] happened, I went to them and said, ‘I’ve done this deal, will you sort it out for me?’
SANDISON A slightly anti-entrepreneurial comment, but I often say to people, ‘why not go and work for a large organisation for 10 years and learn on somebody else’s ticket, if you will, and experience running a business unit of marketing, of sales, of customer services, or of R&D’. And then possibly when you’re in your thirties maybe, a little bit older, and your needs are a bit different, develop the idea you’ve got, or see where the market is, because I see a lot of people who struggle with their business and just can’t get it going – they’ve got a lot of skill gaps.
UPHILL It’s a great question Simon, but actually for me it’s not just about advice, it’s about listening… The people who get the best price are the ones that have competitive advantage and they do that because they design it and they take more time thinking about what competitive advantage is. So it’s about getting the strategy right well in advance and that is a listening process, not a talking process. Too many business leaders talk all the time, don’t listen, and therefore don’t seek the help.
BAXTER The thing about advisers is, I built a European road freight business, it’s a very specific thing, so how many people know about that sector? How many people can advise me on all the deals there have been in that sector, who the buyers are, what do they want? I’m probably the best person because I’ve actually built that and sold it, there’s hardly anyone who’s done what I’ve done. So I think we, as business people, need to understand the market segment that we’re in – who’s doing what, what acquisitions have taken place, what multiples were they on, who’s failed, who’s succeeded, who’s buying companies in that sector.
Even if you’re not for sale for 20 years, you should know those buyers, they should respect you and like you and they should want you, even if you don’t want them. Because maybe one day, you know, you’ll have a health problem, something like that, and you’ll think, ‘Oh, I need to get out of here’.
WALKER We talked earlier about people who say ‘we’re tired, we’ve run out of steam’, and that being the worst position from which to sell a business. What’s your message for people who are in that situation?
UPHILL I think the best thing you can do is get to a position where the team deals with it from a day-to-day point of view, in terms of managing the business. To some extent, that may mean not actually going into the business as often as you currently do. Too many people go into the business every day and answer questions to people who are employed to answer those questions. That is a waste of time.
Go away and get some advice and listen and reflect on where you can create competitive advantage. It’s about looking at your competitors. Interestingly, when we talk to people about strategy, we say ‘how much time have you spent looking at your competitors?’ And they sometimes say, ‘well, we looked at their website last year’. Have they done an audit? Have they done a mystery shopper? You could spend three months doing a detailed audit on your competition and actually analysing why you are better, or how you can be better. But people don’t, they’re too hands-on. So I think, if you’re in that stuck point it’s about stepping back more and then looking ahead further.
LEE Another quick question – you said it’s product and process and people that buyers are interested in. How important is the fact that the company does good or that the company has ulterior, what might be called softer, objectives? I think it’s important to our shareholders – our broader motive is to get more kids to play cricket and to be more active. Does that have value?
UPHILL I write books on best business practice and I’m absolutely convinced that we’re in an age where capitalism is aligning with purposefulness. Consider corporate responsibility – people have departments that look after it, but it should be a value that runs through the whole business. I think people are very disquieted by the idea of wealth without purposefulness, and so I genuinely believe that if you have something like that – if you’re making a difference to society – then buyers will place a value on that going forward.
BAXTER Although we’ve talked a lot about exit and money and things like that, business can’t just be about money. For me, it never was. It’s about having a passion for what you do. Having that passion that runs through your business is brilliant, and will make money in my opinion – I think you can turn it into cash because it actually is the inspiration that drives that business forward.