Taking a business to new ownership – key steps to take

Taking a business to new ownership, in particular an owner managed business with a sole director looking to the next stage, requires the following of key steps. Tom Gallop, at accountants BKL explains how one client succeeded.

Taking a business to new ownership is not straightforward. A lot of history lies behind that stage: anyone visionary and disciplined enough to start a business with one employee and to turn it into something giving work to several hundred within a decade is a striking success by any standards. But what is the next chapter?

The story of a rapidly-growing company near Cambridge, illustrates the challenges that even the best businesses face in a world where standing still is neither an option nor an instinct. The company was founded by one man and he remains its sole director, steering its growth. He alone has built and maintains relationships with blue chip clients, including many businesses in the region.

He has market profile and a big reputation, but the owner also has sole responsibility for the firm and has thought prudently about what the next stage of the journey should be. That is quite a responsibility for one person working without a board of directors but with employees relying on his judgement. It is also a responsibility for his trusted advisers.

For the next stage of his corporate journey, the owner/director wanted to grow the business, which has a multi-million pound turnover and a history of continuous growth, but also to prepare an exit strategy for himself. Companies that depend entirely on the skills and vision of just one person, however successful they are, can deter investors who ask the question: ‘What happens when the founder isn’t there any longer?’.

Therefore, one key aim for a founder and sole director as they work to ensure their own future and that of the enterprise they have created is simple: Make themselves replaceable. Such a move can seem counterintuitive to the immersion, focus and commitment that created their success in the first place. But it is vital. Taking in the client and his ambitions it was decided that the best step was to bring in private equity investment, principally because this would come with the commitment of the investor to help the business expand, especially internationally.

Putting the right investors with the right company requires a deep understanding of an enterprise and its corporate personality, as well as a knowledge about the investors. Getting it wrong can cause a great deal of distress. In this case a fund which adopted a patient capital approach made a good fit. The relationship has worked. In return for taking a minority stake, the company owner will now benefit from having a highly experienced investor on his board. This extra, committed support will help to build the business further and secure its future.

There are certain key steps for a sole director in owner managed businesses to take when considering their next move, and they involve giving up some day-to-day control and recognising that there are simply limits to what one person can do as an enterprise grows, however gifted and committed they are. A company can develop just so far without having a team in place at board level to steer its further expansion. After a certain point there needs to be a sales director, a finance director, someone responsible for human resources and sometimes a chairman.

The reason for a finance director is the depth of expertise needed to understand a big enterprise in great detail. This is also important because an incoming investor at exit by the owner needs to know, as part of their due diligence, the answer to questions such as profitability per customer. In other words, in order to grow, a business must improve the quality of financial information it holds. It can be a challenge for founders to have a grasp of that sort of detail. A finance director will also be across issues such as pricing, whether suppliers are being paid to quickly, or if the business is holding too much stock.

There needs to be a marketing director with responsibility for a sales team. A key question for an owner to ask themselves is: ‘who does a customer complain to when things go wrong?’ If the answer is ‘to me’ rather than an account manager, then something needs to change. Another question an owner should ask is: ‘If I go away for six months, can the business manage without me?’ It should be possible for that to happen in one that is ready to be sold or for major growth.

There is another issue. Timing is also important for attracting investment, whether that is to grow or help a founder to exit a company. It is important to remember that private equity likes to get involved with a growing rather than mature businesses, so the process of deciding next steps should ideally begin before you intend to take them.

Tom Gallop is corporate finance partner at tax and business advisory firm BKL

Further reading: Employee ownership – is it right for your small business?

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Stephanie Spicer

Stephanie Spicer is an editor at Bonhill Group

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