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.

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.