Warning, this is a long post but well worth your time. These are our (abridged) notes of the discussion from last week’s CEO Tales. Essential reading for anyone considering going through the process of a sale.
Our panel (l-r) Ian Gotts, Martin Leuw, Wendy Tan White, Shirin Dehghan
You can see more of the pictures from the night here.
Our thanks to the panel:
• Martin Leuw, Clearswift (ML)
• Wendy Tan White, Moonfruit (WTW)
• Shirin Dehghan, Arieso (SD)
• Ian Gotts, Tibco/Nimbus (IG)
And our thanks also, to our sponsors Erevena Executive Search, FirstCapital, Rackspace and UBS, for supporting an evening of great networking.
Are Businesses bought or sold? Discuss
IG: if someone says that they want to sell the business then that’s going nowhere. Your strategy is your strategy, and if you want to grow the business then a sale will happen if that’s the right thing to happen. The idea that you start with ‘we’ve got to sell the business’ and you appoint advisers and the whole company is focussed on the sale process and then you start changing long term decisions about hiring, what you do with product. To be honest with Nimbus we thought there were no buyers in the market, we concentrated on building a business where we saw a gap in the market. So my answer is go and build a successful business with the right partnerships, so you’re well established in the marketplace. Build your credentials, that’s what the analysts and clients are looking for.
SD: I’m going to be a little controversial and agree with some but not all of what Ian says. I don’t think sales just happen because you’re successful. You can be a very successful business and not known to the acquiring market. So I feel you need to concentrate on building the successful business but always have in mind that you are going to want to exit from this, I’m not doing it as a lifestyle business. So you go out and you prepare for this to happen, you actually talk to a lot of potential acquirers and prepare for that eventuality to happen. So you don’t sell the company – you want to be bought and you prepare for that eventuality to happen.
IG: In the B2B world, who are the most influential people? The analysts, the Gartners, Ovum etc, they are the people who are advising the big corporates who are your most likely buyers. So they are people worth talking to and building partnerships with.
WTW: I think it starts from your motivation. Most people start from the perspective that they want to run a successful company. I mean there are some models – some internet models – that are based on something different – but most people start something because they want to run something and they know it’s going to be a lot of hard work and unless you care about it its not going to happen. In our case we weren’t looking to be bought but we had big partners and it got to the point where they were saying ‘you know, we might just buy you, if you’re happy about it?’ So we had to be commercial about it, we’d created that market and specialised in it, and of course we’d rather be bought than sold.
ML: I think it can be rather complicated in many respects because it depends on who owns the business. So if the founder owns the business you’re in a different position than if you have private VCs or finance involved. So the way I’d tend to answer this is I agree with everything that’s been said, but I’ve always said there’s a very clear distinction between a business strategy and an exit strategy. A business strategy is about building a great business and that’s what management should be absolutely focussed on. And an exit strategy is a shareholder issue. And the worst experience I had early on in my career was when the investors tried to run the business strategy for their own exit. And that is about the most toxic combination you can possibly get. So having learnt that the first time around, I’m absolutely adamant that we keep the two separate and build a great business first. And yes we did think about the buyers, but what we didn’t do was let the investors drive the strategy of what we were going to do. Really what you want to do is build a business that will continually grow, beyond the life of the shareholders you have currently got. And the worst situation is where you’re driven to exit by shareholders, they then wave bye bye and leave you driving a business in a direction that wasn’t where the market was telling you to go. And the other element that is relevant is that if you’re an early stage company looking for funding and a partial exit, that’s a different situation to funders seeking an exit.
What were the biggest challenges you had with your shareholders and your investors in terms of selling your business?
IG: One thing to bear in mind is that you as a founder and your executive team are going to have to make a bunch of warrants about the business and the buyer will want to have every shareholder warrant that business so if they have put £100 million into the business they can claw back that whole £100 million if they need to. Professional investors don’t want anything to do with that, quite reasonably, and the buyer will insist that they do so that will be an impasse, so that often causes a hiccup.
WTW: I think to answer your question we were doing very well up to the point that we were sold so I think they were dual minded. I think they probably felt that they could have carried on. Equally though we felt that it was a good time in the market to sell – before the Facebook IPO – and we’ve been involved in other tech cycles before so we know that these things need to timed well. What also helped was having a bank in between, they were very good in making sure that the investors got what they needed and we got what we needed as well.
SD: I think we were lucky in having a lot of involvement from ours in the sales process. There were a few little niggles along the way but that was confined to UK VCs, some of our US backers couldn’t understand what a warrant requirement was about: ‘Oh, it’s a UK thing, just accept it’ so they did. So I did have a similar thing, some wanted to keep going for a bit longer but my management team and I wanted to do and we managed to persuade them.
ML: so when we did the first Iris exit, the founder had taken a minority and was a nonexec but the senior management team that I had all wanted to retire. We’d grown the business from £30 million to £100 million LBC, who were our investors, wanted out, our management team wanted out and that suited me because it meant that I could change direction with shareholders who had deeper pockets. So that worked. And second time around actually we had a very mature board who felt it was a good time to exit. So while there was no problem around alignment of when to exit the issues tend to come when you’re staying in and you’ve got shareholders exiting, they generally want to sell the business with projections that are right at the top of what’s manageable. So the stress point tends to come around that negotiation and my experience tends to be that the stress points also come 6 months to a year after the deal when you’re putting your tin hat on because there’s a degree to which you’ve really pushed it, and the honeymoon period is over. And whilst it doesn’t affect warrants generally if you negotiate them well, you’ve got to be very aware of what’s being sold because professional shareholders will warrant nothing except they own the shares and sometimes they won’t even warrant that.
SD: well I have an easy answer to that one: no earn out.
WTW: We’ve got golden handcuffs. For us they want us to help brand innovation so in a way they’re buying our time. They’ve just invested a significant amount into growing the brand again and the business, so it makes sense to have us on board. And otherwise we’re very likely to just go and do our next tech startup business. And Moonfruit is a strong brand so in a way we’re an extra channel for them and they’re also building their own brand, which is sort of an online business channel, so in some ways we’re advising on that.
Would you recommend using an adviser to help you sell your business?
IG: I think that’s the wrong question. The point is it’s not a yes/no answer. You’ve got to answer a few questions yourself: do you have the time to do the exit yourself either on your own or with the other non execs. Is there a market to be made and will you have to manage a competition? Do you want to get the deal done quickly? We needed a deal done in four weeks and I needed to either close it or walk away. In fact I wanted to close it, I didn’t want to walk away – the market was consolidating so I really wanted to close that deal. And putting an adviser on that deal would have stretched it out, they would have bought someone else in where there was only one buyer in town.
So if you look at the questions and they are what’s the timing, what’s the landscape, have you got the skills that will start to help you answer the question whether you need an adviser or not.
ML: So if I can just disagree with Ian a bit: it does depend upon the situation, i think in Ian’s situation where there are reasons to move quickly and he knew the market really well. It’s like selling a house with an estate agent. Using your adviser you would expect an adviser to get you a higher price than you would get on your own and make sure that purchasers are actually incentivised to do it. So you need an adviser who really understands your market well and understands the type of buyer you are looking for. So I think it’s wider than just advisers or corp finance advisers. I think you need a really good lawyer and a really good accountant as well. And there are situations actually where I think if you have to chose a really good firm of lawyers can add more value than other advisers do.
IG: we had lawyers and accountants, we just didn’t use corporate finance guys.
WTW: I think this is a bit sector specific, in our case we actually had a banker based out in San Francisco, partly because that’s where we were and partly because he was actually fourth generation San Franciscan – eats and breathes this stuff – and the valley has a certain way a certain dynamic, so he bought a whole suite of seasoned partners, PRs, two lawyers, and he would talk about the magic of the valley, but you know, it was important because I think its a bit like family, there’s an emotional attachment and a process to go through. So he was actually very helpful from the more rational, numeric point of view but also emotionally, what to get involved with and what not to get involved with. So if you asked us whether we were glad that we did take someone on, I think we’re very glad that we did.
SD: Yes, you should take advice. How to choose them? We actually went through a process where we looked at four, asked them about their sector knowledge, took our references from CEOs who had worked with them, but actually in the end it came down to who I felt most comfortable working with – you’re going to have to work closely with people and they’re going to be with you for some time so you have to trust them to talk about your company. And of course the connection with those businesses you think are going to buy, they have to know them. So we found them very useful. And the one other thing that did help, especially if you haven’t sold a business before like myself, they also helped with the preparation of material and managed that due diligence process which can be very disruptive to the running of the business. We had about 40-50 people descending upon us, one after another and we’re a relatively small company so to have that level of attention can get a bit demanding. They were absolutely brilliant throughout that whole process.
IG: but that’s because you weren’t sorted out beforehand.
SD: no we were very sorted out beforehand, despite that we were still under a huge amount of pressure from day to day to manage that degree of questioning and we found we had to spend at least six months preparing a data room, but we still found the whole due diligence process mind bogglingly disruptive.
ML: and if I can add to that on the longterm preparation front, with the corporate finance advisers generally we built relationships maybe 18 months – 2 years before so having set a time frame around this we got to know our advisers reasonably well. We didn’t sign up until close to the time, there was still the tension of a beauty parade, but we knew the chemistry was right, we had enough time to check whether they knew the potential buyers, so a lot of the transaction was around process because a good firm will help you with a very tightly run process. I notice with advisers who aren’t doing a great job they get in the way of process and I think this chimes with what Ian was saying that we always say we’re working within a tight framework for the process and we had bidding deadlines and two or three steps in the process, to narrow things down because we were lucky enough to have a number of parties interested in the business. So advisers were very helpful in protecting us from the worst of the day to day enquiries that generated, which would just have taken up a huge amount of time.
Hazel Moore: I would agree with what the panel said, you need a lot of time to get to know your adviser well in advance of your exit. You need to get to trust them that they understand your business, that they know your market and the buyers you’re working with and also to bounce off them what you need to do to prepare, because you want to have someone you can really trust working with you on that because by the time you’ve made the decision to sell the business you really want to get on with it and you want to get through that process as quickly and tidily as you can so the working with people that know you, and that you trust is critical, so when you say ‘now we’re ready to press the button’ that’s when you can use them to maximise the process.
MarkL: I think it’s important as you’re considering selling the business to test it out with potential advisers and it sounds obvious, but if you ask them how they’d pitch it, you can tell if they really get the business.
Hazel Moore: And I’d like to add to that because as an adviser you can really manage and help with the business so you get familiar with it, because every time someone asks a question you don’t want to be going back to the executives, you need to be able to field that and make sure you know your pitch.
MarkL: so if Ian came to you and said I’ve got this thing and I need to sell it in four weeks, is that a deal you’d be excited about?
Hazel: No, but we can talk about it later Ian.
IG: So we spent some time talking to advisers over three or four years. They were always happy to bounce ideas off me and we talked to them a lot of times about different things. Not with a view to engagement, but just got to know them. Point number 2: if you say you’ve got to build a data room when the deal comes in, you’re not ready.
SD: no, we had a data room ready, but the sheer number of people that descended on us was still disruptive and we valued their help in managing that process.
WTW: I think it depends upon the capacity of the business, in our case we were still running the business day to day and I think if you don’t have a second management team to run the process for you, it’s helpful.
IG: People say: well, we have all our contracts in a folder structure so we know what we’re doing. That’s very different from a data room where it’s like: ‘We’ve got the 17 iterations of the Nestle contract sitting in the Nestle folder but in the data room I just want the one signed contract which is the master’ So we maintained, almost from the last time we were doing funding a separate, very clean dataroom, so when Tibco said, ‘we’ve got a data room structure, can you populate it?’ day two we had 170 documents in there and they were ‘ wow you must be really organised’. And we had 65 guys on their side and 2 on our side and we made sure every single thing was right: there were no situations when they went ‘ooo, there’s a bit of discrepancy there or maybe that’s not quite right’ which suddenly raises a supplementary question. And it’s the supplementary questions where suddenly it all starts to unravel. So it’s not that you’re creating anything that wasn’t already there but actually maintaining that data room and being fairly diligent about how you populate the structure: hey we’re a process company, you’d expect us to be reasonably good at process.
Summly. What does that say about tech exits? Happy days?
IG: one data point does not make a line.
WTW: I think it depends upon the zeitgeist. I mean Nick – I know Nick a bit – he’s a smart guy and often in the tech, consumer market, if you have the right thing at the right time the impact can be immense. He has no revenue, but what he has got is over 1 million eyeballs on his app, he has the brand and Yahoo is giving out a message here about investing in talent and something more cutting edge, which might be why they’ve done it.
ML: if someone comes up with a good product that you can differentiate in the market and that the market wants, then good luck to them. It’s not about how many people you’ve got and sometimes it’s not about revenue: it’s about whether your core is very strong, and that’s key. I think people get very distracted actually and sometimes they focus on areas which are outside their core and then their core becomes really weak, particularly as they mature.
WTW: I think it all comes back to the question of how you value a company. There is a sweet spot between what the acquirer thinks the value should be and what you and your shareholders are prepared to deal. And Yahoo plainly think there is value here for them that they can’t get from elsewhere so it might not be as silly as it would seem.
SD: I’d say lucky fellow.
Emotional ups and downs. What’s your top tip for dealing with the emotional ups and downs?
SD: It is actually quite emotional, especially if you have founded a business and been living in it for the last ten years, because you’re giving away your baby. And the best tip for getting through that emotion is to keep focussed on your share of the money but it is quite emotional.
MarkL: Anything you regret doing?
SD: no, and if I do, it’s too late! It was the right thing, we could have gone on but we knew it was the right time to sell.
WTW: I think you need to get clear in your mind why you’re doing it. If you don’t know why you’re doing it it’s very difficult. In our case we were married and we work together, and building a business is rather like a marriage anyhow, so one thing to get clear about is the terms of reference. If you can get clear about that then you can punch beyond the sale process: it’s a bit like a birth, it’s not about the birth, it’s about the growing up and the next stage. You want to look beyond the point of acquisition: yes you’ve made some money but it means a lot more than that, so what does it allow you to do next. I’ve met entrepreneurs who get very depressed at this stage, yes they’ve made lots of money but what does it allow them to do next?
ML: it’s true its a very emotional time, I didn’t found the business but I was emotionally connected with it because I was growing it at a crucial time. And for me what got me through it was considering the three sets of stakeholders, the employees, the customers and the investors and what I wanted to do was make sure that each one got the very best out of it, otherwise I wouldn’t be happy. But I think from an emotional point of view I was probably the only one who cared about all three groups, my shareholders didn’t care. One of the things that made it better was the fact that all of our employees were shareholders and I fought very hard at the outset for this and we carried this through to exit, which helped me emotionally. And coming back to the point about afterwards, I think a lot of people suffer from the feeling OK you’ve made money out of it but what happens next? It’s a bit like a bonus, you get the bonus, you spend it and it disappears really quick, so I think there’s a bit more to it than that.
IG: I think what keeps you going through it is whether you’re doing it for the right reasons, ie for the shareholders, the customers and the employees. I think a Bodgitt and Startup mentality is a very different set of rules, where you just want to sell it to someone and they’re not interested, then focus on the money, focus on whatever it takes to get a deal done. But actually if you’ve started a business, you’ve grown the employees and you’ve grown the customers, if you’re not true to that then that tears you apart.
WTW: Jo, you were part of the deal too, what did you think?
Jo White: Well I think the advisers were very helpful in getting through it, even the most cynical valley banker guy, as Wendy said, talked about the magic of the valley and we’d had a couple of mentors in who’d talked to us and that was hugely important because they knew exactly the emotions we’d go through and I remember when we’d started the process, one of them said ‘this is the fun bit’ and we were like ‘uuuh, this isn’t fun at all’. But he knew exactly how to get us through the next steps, so look for advice and support would be the lesson I draw from that.
MarkL: yes, a lot of people have said to me that advisers that you trust and can trust to say no to things are important for a sense of security, I mean I took something to Hazel a few weeks back and she said ‘no, not for us’ and that degree of clarity is important in an adviser.
Mark Mason, Mubaloo: How long did it take you to sell?
WTW: well, we had some discussions in October, and by January we had appointed a banker. We actually went out around March, had an offer in four weeks and closed by the beginning of June.
SD: for us, the preparations were a lot longer, we started preparing and talking to acquirers and bankers 18 months ago but we actually got the offer in December – Christmas day, or the day after, and we closed the 8th March, so that was pretty quick.
IG: so they said, we can do this very quickly’ and I said ‘what’s really quick?’ and they said ‘four weeks’. So I said ‘right, four weeks from now will be x and that’s what we’ll put on the letter of intent and I’ve got a bunch of people talking to me so do it or don’t do it, I’m not bothered’.
That was a lie, the ‘I’m not bothered’.
MarkL: Martin, did you sell lines like this to other people when you were buying and selling companies?
ML: There are two points to this, selling or buying. From a selling point of view, Iris was a business with a very high subscription revenue, which meant if we sold at the end of the financial year, we could sell on the numbers for the year following, which were generally better. So towards autumn was when we were thinking about doing it, with a view to appointing an adviser early in the new year, getting an IM done in February or March and closing the deal over April and May, and bizarrely the two buy-outs I was involved both closed around the 3/4 June. But the key point was to keep the timescale tight, and having done it once, we used it as a blueprint for the second time and it worked.
Obviously if you’re buying businesses it’s very important to hear the emotional side. And obviously we’ve bought a lot of businesses off entrepreneurs over the years and understanding the emotional journey they’re going through, the thoughts about where is their baby going to go, what about their employees. At that point our biggest competitor was Sage, but in the end we were buying very high quality businesses who were refusing to go to Sage, even though they were offering a higher price, because what we were offering was a safe haven for entrepreneurs.
IG: but you always get people who want to slow it down, so obviously there’s a terrible amount of due diligence involved, but if you’ve been efficient in getting those questions answered if you get the same question, phrased in a different way you can say: ‘look, you’ve asked all these questions already, you’ve got four weeks’ The point is that we were able to answer every question immediately so we were not putting delays into the process and were able to say, ‘you’ve had all your questions, you’re starting to rehash questions now’ without being unfair.
What was the first thing you bought after you sold your company?
SD: an X5.
The best shoes ever seen at CEO Tales
MarkL: A car? Yes.
WTW: these <points at shoes>
MarkL: I have to say Wendy, I’m not big on cars and I’m not big on clothes but those are the best shoes I’ve seen at CEO tales
ML: I bought a pizza, I hadn’t eaten in about 48 hours.
IG: I can’t remember, I really can’t. In fact it was wierd, the moment of doing the deal was not about the money, it was more about, well how are we going to manage it with the staff and doing all those things. So in fact I was quite conscious of not going and buying something, because although I and a couple of other guys had made quite a lot of money out of it, we were conscious that the staff were going to have to continue working. If you ever talk to any Olympic medallists, there’s a huge anticlimax when you’ve won a medal. Ok, you’ve won it, now what?
How important is the competitive tension in the process?
SD: super important.
WTW: yes, and not just for the price also to keep them honest. It’s like selling your house, if they don’t perform you can say I’m sorry but there’s someone else who will do it.
ML: it’s not just about the price. In some cases if you’re selling your business you won’t necessarily take the highest price, there are situations – for example if you have a competitor business interested in you – where you wouldn’t want to take the highest price and then competitive tension is crucial to give you alternatives.
IG: actually the competitive tension on our side was the alternative that we would just grow the business. Did I want to do that, no because I saw a risk in doing that vs just taking the cash. And this comes back to the point that it should always be an option if you’ve got a good business strategy and you know what you’re doing. If you’ve done lots of things to try and dress the business up and made some bad decisions then you’ve got a problem with what happens after, and I think that’s a big issue because ultimately you’ve got to be able to walk away.
SD: I think the best competitive tension you can get is between two arch rivals. Neither of them wants the other to have you and that really pushes the price up.
WTW: The flip of that is be clear about who you want to be with. It doesn’t mean you can’t use the alternative bid as a stalking horse but very often you sort of know who you want to be with, but at the end of the day you’ve got to use competition to do the best deal and to keep them honest.
What was your biggest mistake in selling your company?
IG: I think my biggest mistake in the business was even starting the business in the first place! When I left the company part of my exit agreement was that I wouldn’t start another BPN company within 2 years and I said ‘you can put 2000 in there if you want’. It was so hard and we should have walked away, but by the time we’d hired staff and put time into it we thought we should finish it. We didn’t realise finishing it meant 15 years.
WTW: We got a lot of great advice so we set up a very good flexible pre-nup in our contract so we set up a situation post the deal that really works for us. I think emotionally one thing that we missed was a better break – it is emotional, tiring, and you’re still running the business and then you’ve got to move from controlling a sixty person organisation to being part of a 1000 person plus business, it’s a big shift. So some time to get our heads clear and get centred would have been valuable. Because the truth is there’s nothing you can’t ask for in that situation, if we’d just said, look we need to take 3 or 4 weeks to recharge you’ll get more out of us at this point, it would have been a healthier thing to do.
ML: I think the biggest lesson I learned the first time around was I was asked by bidder if I could provide 10 references on me. I said ‘why 10’ and he said ‘well it’s relatively easy to find 2 or 3 people who’ll say you’re a nice bloke, but 10 is a bigger challenge’ So I asked for 10 references for him which was massively helpful because then you’re able to talk to people who have done business with him and discuss what’s the best way to do business with him. So actually taking references up on people you’re doing business with and when you speak to them find out what they might do different makes you something of an expert in that sales process.
Around the business itself, the best lesson I can offer is go out and recruit the very best people you can find for the team around you, even if you can’t afford it and sometimes it’s frightening to get in people who have been used to doing something much bigger than what you want them to do. The moment we started doing that we started to grow much quicker.
SD: I don’t think I made any mistakes – ask me that question in four months I might have a different answer!
IG: when we did the deal it was all cash up front and it was very nice but we also asked for some shares and there was actually a very large number of shares on the table. And we wanted to spread those evenly across the entire company. What I’d do next time was every year, if people were leaving, those shares would get bought back and reallocated, because there’s probably a million dollars of shares that never really got picked up properly.
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