Time to make an exit?

With trade buyers and PE firms on the prowl, make sure you know how to sell for the right price.

With aggressive trade buyers on the prowl and private equity firms expanding their portfolios, there are ways to make sure you can sell your business for the right price.

While many experts will say that now is not the time to sell your business, there are entrepreneurs out there proving that good businesses still command healthy valuations regardless of the wider economy.

Mark Dickinson, MD of energy risk management company Encore, recently sold the business to McKinnon & Clarke for £6.25 million. ‘I founded the company with three other shareholders back in 2001,’ he says. ‘There was no outside capital and we’ve grown the business from there to sales of £4.5 million with profits of £1 million profit.’

The deal was necessary, says Dickinson, if Encore was to achieve the necessary scale. McKinnon & Clarke, which has 450 staff and offices in 13 countries, conducted a £22 million MBO at the tail end of last year that was backed by Lyceum Capital. This firepower gave Dickinson confidence as he felt the buyer had the support to undertake the consolidation that was needed to be a success in the sector. ‘The strategic fit between McKinnon & Clarke and Encore, backed with the vision and resources of Lyceum, present the best strategic opportunity in the marketplace,’ he says.

Adapted Vehicle Hire, which rents cars and vans to people with disabilities, was bought by Nexus Vehicle Rental in June. Jon Reynolds, one of the founders of AVH, says that an exit had been in mind since the company was set up in 2005. ‘We’d always looked at potentially selling within five years if we’d built the business up correctly. To be honest, it exceeded what we’d expected.’

Reynolds had already dealt with Nexus for a couple of years and he knew they would be interested if he ever considered selling. ‘We fitted their niche market and they felt we’d add something to their portfolio. That was around September 2009 and just before Christmas we gave them a call and said let’s get something going and see what you’re willing to offer.’

Part of the reason to sell stemmed from the financial pressures caused by the downturn. Reynolds says: ‘We felt that it was the right time for us because we tightened our belts last year during the recession the same as everybody else, and we felt that we were getting good value for money. Also, what [Nexus] said they planned to do with the business was along the same lines as our own; they can just do it a lot quicker because of the financial backing they have. Up to now, we had been funding growth all by ourselves.’

Brian Livingston, head of M&A at professional services firm Smith & Williamson, comments that the rules for achieving a respectable exit are the same today as they were in the heady dealmaking days of 2007. ‘The market is not necessarily about when you’re ready to exit; it’s about when someone is prepared to buy you. We say that most companies should be prepared for an exit so that they can respond properly at any point. If a big corporate decides it wants to act, quite often if you’re not ready to sell then it will move on and buy someone else.’

The uptick in deals is due in part to an increasing realism from vendors about the prices they can expect for their companies. Livingston says: ‘People are seeing that everything isn’t going to become wonderful in a year’s time. Vendors are accepting that £25 million for their business is enough for them personally and their families. Prices may be substantially lower than three years ago, but you can still get good valuations in 2010.’

Tim Jackson is finance director at HR and outsourcing company Staffline, which has completed six deals in the past year. He says there are two types of vendors: those who want to sell their business because the time is right, and those whom HMRC is ‘encouraging’ to do so because they owe the tax office money.

Although valuations have fallen, Jackson says the appetite to get a transaction done remains high. ‘The prices are different to what businesses would have sold for two to three years ago, but then we wouldn’t have paid those prices back then.’

Andrew Garside, a partner at ISIS Private Equity, makes a similar point. He states that the market poses an interesting dilemma for management teams: ‘If they have successfully traded through the recession, they may feel like extracting value from the progress they have made to date. However, at the same time, they might also be seeking some really interesting growth opportunities.’

A number of management teams, claims Garside, are opting for a partial exit. This is when a director sells shares to a third party to take cash out of the business for themselves, while also bringing in investment which can take the company forward. ‘Some management teams feel they either have to sell the business or stay with it; we say that you can do both.’

The main driver for M&A activity at present remains trade sales as consolidation continues apace. Still, there’s no denying that confidence among dealmakers is fragile: ‘It wouldn’t take much to knock deal flow one way or the other,’ admits Livingston. ‘Transactions are taking longer and due diligence is much more challenging than it used to be.’

Related: How to choose the right exit strategy

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...