Preparing for payday
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James Caan and Paul Herman explain that while a business may appear to be in rude health, cracks beneath the surface may prevent even the most optimistic of buyer from pressing the button.
For most entrepreneurs there comes a point in the lifespan of their business when they will look to cash in on all their hard work and sleepless nights by selling up.
While there is no doubt that a passion and un-burning belief in what they are doing will have been a big contributor to getting them to an exit stage, the process of finding an acquirer and closing a deal can often be a daunting process.
For entrepreneur and investor James Caan it was a process he tried to get going in 1995 when he woke up one morning and decided that he wanted to sell his recruitment company Alexander Mann.
However, it would be five years of hard work and restructuring before Caan managed to get the business sale ready, a process which he says added value but was unexpected.
Caan says that when he first went to see a broker he was told that the business was great, the revenues looked fantastic, but that it wasn’t saleable.
‘He said the business was all about me, and investors aren’t interested in a business where if I catch a cold the whole thing evaporates,’ he explains.
Caan went away with his tail between his legs and spent the next four years ‘grooming’ his business for sale. He changed the management structure, putting in a layer so it wasn’t so dependent on him, and spread his customer base so that it was more balanced.
He also changed up his IT system to bring it up to speed and implemented what he now sees as the basics such as properly minuted board meetings.
‘It was interesting that when I did the things I was supposed to I got an incredible multiple for the business, probably 40 per cent more than if I had sold it before,’ Caan reveals.
‘There is no doubt in my mind that that is how you should do it. Why spend your lifetime creating what is your baby and passion and then literally give it away, not because of the market, but because of what you don’t know.’
Caan says he was ready to sell his business in 1995, and believed the timing was right. Having to go through a five year preparation period when he wanted to exit was, although a necessary evil, a process he thinks entrepreneurs and business builders should try and avoid.
Best of both worlds
Having previously worked with corporate financier Paul Herman through the sale of the Retail Profile business, Caan is now joining forces with the former Cavendish Corporate Finance partner to launch their own version of a business exit advisor, one with an emphasis on the pre-sale planning element of the process.
Herman has previously worked with Gü founder James Averdieck when the chocolate entrepreneur sold his business in 2010 for £35 million. However, even in that deal Herman encountered problems, which if addressed at an earlier stage would have led to a far more comfortable sale process.
If an exit is in the pipeline, and it is for most entrepreneurs, Herman says that three key points must be addressed. He believes there must be an emphasis on making the business more valuable, not in terms of profit, but from a capital perspective.
The business must also become more saleable and linked to the ‘purchaser universe’.
With statistics from the 2011 version of the Harvard Business review showing that upwards of 70 per cent of all business sale processes collapse, Caan and Herman believe that their new Bluebox venture could substantially lower this sum by focusing on getting a company sale ready in the years proceeding the transaction.
When looking at the big mistakes made while selling a business, Herman points towards a lack of solid trading through the sale as a major problem.
‘You start at one point and as the deal moves through the due diligence process the owner or spouse starts thinking about helicopters, holidays and the mortgage being paid off so very quickly they take their eye off the ball,’ Herman explains.
Due diligence is conducted to iron out the kinks and uncover the kind of business irregulatries that could derail a once successful business, issues that Herman says should be addressed at a far earlier stage.
‘Pension issues come up in certain large businesses, and these are problems that can’t be tackled overnight. A lost share certificate is £1000 and a couple of hours but not having the right intellectual property or a deficit in the pension fund become timely issues,’ Herman adds.
The fact that Caan’s Alexander Mann business is going from strength to strength and has grown its revenues from £130 million at time of sale to £400 million today is not a sticking point for the Dragons’ Den judge, more a source of pride that he built his business correctly and handed it over with the house in order.
‘If I look at the business today it’s international, it’s number one in its market. I look back and say it was a proud momment for me,’ Caan admits.
‘Would I feel better if the business and collapsed but I had still made a lot of money, no, that is not a success for me. It was a win-win situation, both sides got what they wanted.’
Today’s economic environment is throwing up an increasing amount of questions when it comes to selling a business, Caan and Herman say, and a lot of the issues involved are not something your classic entrepreneur understands or considers.
Bluebox is supplementing its offering by involving entrepreneurs that Herman has worked with during his career of selling companies.
Alongside Gu’s Averdieck, the firm has also enlisted the expertise of Victor Lewis, who sold his World Trade Group business to the management team and private equity firm Greenhill Capital Partners for £30 million in 2011.Xit2’s Paul Duckworth is also getting involved as part of a team of entrepreneurs that can shed light on aspects they would have done differently.
Bluebox itself has been set up with an exit in mind and will be taking a leaf out of its own book to produce a business which is sale ready long ahead of an exit date.