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| 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | Events |
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FirstCapital Breakfast Seminar: Is now the right time to sell your company?
Press Release, 6 December 2006
>> Please click here to view the presentation online (Internet Explorer only), or to download as a PDF file <<
Technology corporate finance specialist FirstCapital hosted a breakfast seminar on the 6th December 2006 focused on exploring the issues that entrepreneurs and investors need to consider when selling technology companies. More than 100 entrepreneurs, venture capitalists and industry executives gathered to evaluate recent trends.
The speakers were:
- Jason Purcell, CEO, FirstCapital.
- Neil McArthur, Head of Networks, Carphone Warehouse, who founded Opal Telecom in 1996 which was acquired by Carphone Warehouse in 2002 for £108mn.
- Julian Harris, Founder of Smart421 which was acquired by Kingston Communications in September 2006 for £24.2mn.
- Andrew Phillipps, Founder and CEO of Active Hotels, which grew to become the largest hotel booking site in Europe prior to its sale to Priceline.com for £90mn in 2004.
- Andrew Carruthers, CEO, NewMedia SPARK, the venture capital investor with recent exits including the sale of Mergermarket to Pearson for £101mn, the sale of Footfall to Experian for £36mn and the sale of Elata to Qualcomm for £57mn.
Jason Purcell opened the seminar by presenting the findings of a FirstCapital study of all transactions in European Technology M&A over the past 7 years. He used this data to address some of the myths that have arisen around selling technology companies. The presentation is available separately at www.firstcapital.co.uk.
Determine whether the sale is strategic or financial
The panellists emphasised the role of positioning in achieving a strategic sale, and in particular the need to understand the buyer's requirements in order to maximise valuation. In the case of Active Hotels, the clear market leader had less incentive to buy than the players trying to catch up. An exit which is at once both strategic and earnings enhancing for the buyer is the perfect scenario; nonetheless 90% of acquisitions are for earnings, not for strategic reasons.
When is the right time to sell?
Andrew highlighted that strategic sales often happen before the point where the management feels that the business has fully developed and reached its peak. Timing is all important: when the buyers have a pressing need for a strategic asset of a particular type is when they will pay up for it.
When the acquirer is buying for financial reasons, it is buying next year's revenue and growth, not the current year's, therefore it is essential for the company to ensure that growth is not trailing off. He cautioned that earnings-dilutive deals can be problematic, and often fall over at the 11th hour.
It is also important to remember that public markets can be irrational, and may pay over the odds for assets they see as strategic. His advice is: "if the ducks are quacking, then feed them!".
Putting in place the right process
All panellists spoke of the importance of running a tightly managed process and of the key requirement to hire good advisors. Andrew commented that this can make the difference between a successful exit and an unsuccessful one. Advisers must be incentivised properly to get the best deal, and to prioritise your business. The right advisor will take the pressure off management and shareholders and deal with a lot of the process issues such as negotiation. SPARK achieved a 35% uptick on pricerunner.com at the last minute due to good process. He also highlighted how distracting the process is, which further emphasises the importance of proper planning and process.
The importance of good communication
It is imperative to make sure all shareholder groups are on the same page. In some cases management may need to stay in the business for an earn-out, so chemistry with the buyer is more important for them than it is for other exiting shareholders. Several panellists commented on the difficulty of effectively structuring earn-outs, and of locking in wealthy employees. It is essential to make sure that all eventualities have been discussed in advance and consensus reached among shareholders - buyers will pick up on any differences and exploit any cracks.
Julian reiterated the importance of keeping the business going throughout the process. Smart's valuation was helped by the fact that they continued to beat their forecast numbers throughout the sale process.
Preparation
Andy pointed to the importance of preparation and exit planning, and Julian reinforced this, commenting that he planned his exit meticulously, as he was determined to achieve a successful exit this time, having missed out with a previous company at the end of the 90s. Despite this, Julian said that next time he would plan his exit right from the beginning, rather than from 12 months out, as in his opinion, you can't start planning early enough.
Key takeaways for Julian from his sale process were:
- Know what you want from your exit and plan for it from the start
- Don't listen to valuation multiples. Fundamentally, people pay up for assets that are valuable to them.
- Running a professionally managed exit process is essential. If you do not do this, you will sell more cheaply than you should.
- Prepare internal team for battle. The exit process is time-consuming and arduous. Smart had 4- 5 members of management working on the deal, which was a significant number for a small company.
Neil spoke about exits from 2 perspectives: the perspective of the acquired company (Opal Telecom experience in being acquired), and the perspective of the buyer (Carphone Warehouse experience acquiring other companies).
Neil highlighted what, for him, are some of the key points in achieving a successful exit:
- The best deal is one you can do. A deal is no use if it is not going to complete.
- The business is only worth what someone is prepared to pay for it, regardless of what valuations multiples are mentioned or what analysts say it should be worth.
- It is essential to think about the exit before you start or buy a business.
- Try and sell just before the top of the market. Leave some upside for the buyer and let them see it.
- Having a business which is seen as "sexy" is important in maximising valuation. Neil defined a "sexy" business as one where investors can predict cashflow and earnings and can see how it can scale. It also needs to be in vogue.
Some of the benefits on a personal level which come from exiting include:
- Taking some chips off the table is important: you are better for it and more relaxed personally
- It is good to be able to roll the dice with someone else's cash (as long as there is some upside in it for you!)
- Fatigue is a factor in deciding to exit. It is hard to maintain a 25 year race pace.
- Being part of a winning team is important - his decision to stay with Carphone Warehouse and work with an ambitious team there was a good one for him.
- Entrepreneurs rarely cash their chips in and sit on the cash earning 4%. When you exit your business with a large sum it is a challenge to decide what to do next. Don't rush the decision, but you should be thinking it through early.
AIM is not an Exit
The panel commented that AIM is good for raising money for growth, but is not an exit. They stressed the importance of trying to take some cash out when you float on AIM as it will likely be a long time before being able to take more out. Neil also mentioned the purchaser's perspective: it is more expensive to buy a public company so he would advise against AIM unless there is a specific growth reason.
As a final point, Neil pointed out that the acquisition of Opal was a win-win deal for both Opal and Carphone Warehouse, and that this is a critical indicator of a successful deal. If the acquirer is happy with the outcome of the deal, it is better for the management of the acquired company, and helps to ensure the successful achievement of any earn outs which may be in place.
>> Please click here to view the presentation online (Internet Explorer only), or to download as a PDF file <<
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