#15: Future for the Founder

This links up quite nicely with the previous issue of Choices. As we have discovered, a business achieving sustainable profitable growth offers choices to its owner or owners, as it is operating from a position of comparative strength. Let us consider the implications of some of these choices for the founder, which could be paraphrased as “move on or move out”.

The first one might be acquisitions that could be made to achieve a step-change in growth as opposed to being satisfied with organic growth. My business partner Stephen Furner is something of a guru in this space. He looks a lot at acquisition drivers, which could include the need to widen your product or service offering, and/or to enter proven markets at home or abroad, in order to stay ahead of the competition.

“Your company will benefit from speed of access to new products and services, broader skill sets, and established customer/client bases. This approach can avoid a huge drain on cash resources for a company attempting to achieve growth by way of organic development, particularly in overseas markets”.

The other two key components to an acquisition strategy are getting ready to acquire and getting it right!

As Stephen says in terms of getting ready:

“You have to be well prepared for the process, with a capable management team and scalable technology that can absorb the target company with minimum disruption. Your business plan will have identified areas for potential growth and your second step is to make a full, ‘acquisition search’. Hiring a non-executive director or business adviser at this stage will minimise your early costs, provide expert guidance in the process and prevent you from making poor decisions.

Your acquisition plan will need to state the amount of funding available to acquire a target company and you must arrange access to finance before you start the process.

Ask yourself whether the target company will add value to your business through wider offering and markets. Ensure that market growth is sustainable and fits with your business model. Make sure the target has a product or service that differentiates itself from the competition. You should always ask why the company is for sale. Check for healthy profit and loss and cash flow indicators, and quality of customer base, including the level of concentration with major customers.

Research external factors in target markets so that you are aware of potential disruptions. Confirm that the target has a strong second-tier management in place, especially if you cannot tie in the owner to an earn-out deal or a service contract.”

And he is always at pains to stress the importance of getting it right:

“When you have identified your targets, you can approach them, discuss the possibly of an acquisition and establish a sound valuation. From there the detailed buying process can start. You will need to hire a commercially-minded solicitor to guide the legal process.

Acquisition is just the start, so don’t delay planning your implementation strategy with your new asset until after the deal is done. You need to be ready to hit the ground running.”

Another choice the founder has is the reverse strategy i.e. exit. It’s vital to get this right after all the hard work that he or she has put into building up the business so it is potentially attractive to a buyer. The most common exit route is a trade sale, so let’s focus on that.

A few key aspects to reflect on:

1. Careful planning is essential – allow up to 5 years to groom the business for sale.
2. Your key objectives would be:
   a. To find three or more buyers willing and capable of bidding for the company at about the same time.
   b. To organise and present the business in such a way that the transfer of ownership is smooth and relatively quick.
   c. To be able to turn down unacceptable offers.
3. Always have a “Plan B” i.e. what will you do if there are no appropriate buyers?
4. Make sure you get advice early, starting with a reality check on planning for a sale, as it is not easy to sell a small company. This should include how attractive is your company to a potential buyer, and can it be made more attractive, and what will the mindset of a potential buyer be in terms of expectations, valuations etc.
5. Ensure that throughout the process you always maintain the momentum and trajectory of the business and don’t get distracted by the sale process.
6. Make sure you have assessed the value destroyers (get rid of these) and value enhancers (protect these) in your business.
7. Surround yourself with quality advisers (a non-executive director perhaps, plus a corporate finance firm, accountant, tax adviser and solicitor)

In summary, you need to be as meticulous in planning for a successful sale as you were at the outset planning for a business capable of sustainable profitable growth.

One alternative to a trade sale is succession planning, where the theory is you withdraw from the business gracefully at a time of your choosing, leaving it in capable hands. You probably need to allow at least 18 months to build a well-balanced management team capable of stepping up to board responsibilities when you move on. You may have to make some hard choices as the people who have helped you to grow the business may not be the best people to run it after your departure.

If you put in place a sound management performance system, with key indicators that your team are meeting the demands of the business, you can test them out before you hand over the reins, as you will have established a process whereby there is no need for you to micromanage or interfere unnecessarily.

The final option to consider is franchising. This is a tricky option and far from straightforward, but it could represent a financially attractive option for taking your business to the next (and a significantly different) level.

It is vital that you seek professional advice for the outset, as this is such a specialist area. One of the key issues is that your operating model is moving from being a pure business to being a training and support organisation for a group of independent bosses.

Some questions to ask yourself:

1. Are you fully satisfied that you can consider the performance of the business to be “proven”?
2. Have you the wherewithal to make the necessary investment to operate as the franchisor e.g. creating a central infrastructure, legal costs, creating handbooks, manuals and plans, establishing training and monitoring programmes, creating marketing and sales collateral etc.?
3. Have you the management skills to act as franchisor?
4. How will you protect your brand?
5. How will you find and recruit franchisees?

A couple of people I have worked with had eminently “franchisable” businesses, and tested their respective models by arranging pilots with “warm” contacts. They also undertook a great deal of research, interviewing other franchisors so that they were genuinely going into the franchise world “eyes wide open”.

So, there is plenty for a successful owner to consider in terms of next steps.