A tale of a business partnership. Joint business owners and MDs (Colin & David), who went into business in early 2000’s, after a period where they had been working in a successful start-up, but they increasingly felt that they had no control over their lives.
The pair got together formed the business as 50/50 partners and fairly soon after it was clear that their skillsets were very different with one of the partners feeling that he was more industrious than the other, but despite the mismatch in terms of skills, they continued on. One of them was looking after the sales of the business whilst the other looked after the back office.
This scenario continued and the business grew with increased headcount and despite many occasions when both partners held discussions about how the division of labour was split, they always seemed to sort things out.
Both of the partners felt that at some stage they would want an exit but they had very different views of the value of the business. One had a view that the value of the business must be £1 or even £2 million pound, without any evidence, whilst the other was more pragmatic. There was an expectation that at some stage they would exit with some cash in the bank for their efforts.
Over the years, the business went through periods of growth, followed by flat-lined periods and very challenging times too. Despite this they continued on, but privately they started to consider what they would do next.
After being in business for almost 20 years, they started a process of an investigation to exit and, by chance, a larger competitor approached the business owners to discuss the possibility of sale. To determine the current value, Colin & David sought the advice of a business broker who provided a positive valuation, albeit surprisingly high and despite the business being in a slow decline.
The valuation was very tempting, however, in order to engage their services, the broker required an upfront fee of around £10,000 for an exclusive listing and market preparation, along with a transaction fee on any subsequent sale (this was around 3% of the ultimate sales price).
They decided, armed with this inflated valuation, that the more likely sale, would be to a competitor with a guaranteed outcome, rather than having to pay a broker fee, without any guarantees.
The sale process was not easy, lots of due diligence and preparation, which resulted in a further reduction in business, as so much time was being spent collating the necessary documentation in preparation for the sale.
Eventually, many months later, the sale went ahead, although this was a long, painful and expensive experience, all parties suffered deal fatigue and eventually, just wanted to get things completed and move on.
The deal went ahead with an agreed severance pay-off for David, which was significantly below his lofty expectations, with Colin staying on as a Director on a salary with shares in the company.
Both Colin & David, were each personally responsible for their own legal fees a sum of £20,000. Not something that they had expected as they were selling their business.
That’s right, both partners had to pay their legal advisers for the privilege of selling their business from their own savings, whilst the acquirer, once the deal was finalised, was able to pass their legal and financial due diligence expenditure through the newly purchased business (a sum of c£50000 was placed into the P&L as a business expense).
Despite the unexpected legal costs, the new business relationship started well with a fresh perspective and all was going well until Colin’s partner suffered a serious accident, which meant that he could not commit full time to work and as he struggled on, he had a mental health breakdown.
The result of this breakdown was that he was off work for around 4 months, without pay. After spending some time recuperating both he and his wife recovered but he felt that he should reduce his working days as he needed some personal space in his recovery phase.
The new employer accepted this and paid him a pro-rata salary.
His return to productivity was slow, despite a heavier workload and limited support. The new owners were unsatisfied with his progress and felt he wasn’t meeting their expectations, so they increased the pressure and suggested he take on a new role with little direct experience of the sector. He was open to the challenge, but suspected the owners had ulterior motives to remove him from the business. This led to increased pressure and a further decline in his mental health.
Fortunately he was able to reach out to his support network and he managed to speak with his GP and other friends who provided a bit of perspective.
He had been in the same industry for 20 years, he had a huge network of clients in the sector that he had always worked in and many of his clients were personal friends. His company had been acquired because of this strength and, despite stabilising numbers, he was being encouraged to start in a brand new sector.
Despite this pressure he carried out some analysis on where his performance was and what was required to get him to increase business levels. Once he had this information, he started to figure out, what he needed to do to ensure that he continue to focus on his specialty area and prepared a business case for his new employers, requesting administration support, which would ultimately enable his focus on more productive tasks, and generate income for both him and the business.
The results have started to come through and he is now in a much greater mental space, with clarity about where he needs to focus.
He has even accepted that the acquirer may not have the same long term outlook as he does and he is now looking to exit on his terms, rather than on theirs.
The business had a legacy and overall was a successful business but in the end their exit value was significantly less than they had expected.
A great purchase for the new owners, who have had to do very little to integrate a cash generating business, which introduces them to a new sector and at the same time folds neatly into their portfolio, increasing their ultimate value multiple.
What suggestions do you have that could have helped the business owners get a better outcome to their situation?
- Consideration of Mergers or Acquisitions as part of their growth or exit strategy earlier on in their business career.
- More clarity at the very start of the partnership around effort/reward splits and Directors rights.
- Work to get interest from more than one interested buying party, thereby creating competition from buyers.
- Improved legal advice during the pre-sale and sale process.
- Agree a share purchase deal with the other partner to buy their share of the business, rather than selling to a third party.
- Prepare in advance for the due diligence, rather than having to get things done, whilst still having to drive the business.