Mastering the Art of Business Exits: Expert Strategies with Lee Humble

Welcome to the podcast that’s dedicated to helping business owners to prepare for exit so that you can maximise your valuation and then exit on your terms. This is the Exit Insights podcast presented by Succession Plus. I’m Darryl Bates-Brownsword, and today I’ve got Lee Humble from Azets. Now, Lee,  Azets is an accounting practice, fast growing accounting practice here in the UK. They’ve got a great nationwide presence, and Lee heads up the corporate finance team.

I met Lee when he wrote a really interesting blog post just towards the end of last year. I think it was Lee, and he touched on a topic that I’m not seeing too many other people talk about, and it resonated with me. And that topic was as a business owner, as an entrepreneur, we love the idea of building our business to a point where we get noticed in the marketplace.

And then hopefully, our dream scenario is that someone comes and taps us on the shoulder and says, what a fantastic business. I’d like to buy it from you. And if we’re not ready for exit. Then it may not work out. And that’s what Lee wrote on.

So I thought, let me tap into Lee’s brain and because he seems to have a lot of experience on this. So, Lee, welcome. Thanks for joining us and I’m really excited for this conversation.

Yeah, thank you. No, definitely. I think it’s certainly a very good topic and it’s something which clearly, across 2023, a lot of our customers have kind of leaned on us for advice. So we’re certainly happy to share the knowledge, the experience we’ve got in this field.

Brilliant. Lee, why don’t you frame up the typical scenario that you come across and how you see, and then we can start between us picking apart why it falls over or what good looks like and how to be ready for such an opportunity and on the front foot and what have you.

Sure. So I think the one thing I’ll start off by saying is I think if I was to look at the deals we completed last year, of which there were north of 100, around a half of those were deals where a buyer had already approached a business owner. So there was a tap on the shoulder, an email, a letter, just outlining some interest and outlining the desire to open negotiations for a transaction. Now, it’s clearly a scenario which is extremely flattering for business owners. It’s a scenario which, after the last three, four years, is welcomed by a lot because let’s face it, as owners of businesses, as management teams will attest, it has been a very difficult period. And I think it’s very easy for business owners to then end up in a series of conversations with a party that they might not know, and hence why a lot of our clients will then reach out to us just to ask for a little advice as to what should they share, what should they not share, and how does a transactional process actually work?

And that’s a really good point, because I think that what the situation often is is that if the buyer makes an unsolicited approach, it suggests that they’re experienced at doing this and they’re probably making more than one or two approaches in a year. They’re possibly making quite a few more, but from the owner’s perspective, they’re used to selling their product, but they’ve never sold their business before. So this is a first time for them.

And I guess there’s a chance that they can get caught off guard and give too much away too early and put themselves in a position where they may not get the best deal possible or they could get taken advantage of is that what’s happening out there?

100%. It’s a real risk. Let’s face it. When you sell a business asset, it is something which you might only ever go through once. It really is a lifetime moment for a lot of business owners. That’s their baby. They’ve spent a lot of time, effort, blood, sweat, tears have gone into the build of that. And it can be a very emotional subject. It’s something where again, you touch on an interesting point from a commercial sensitivity perspective, you can give a little too much away. If I look at some of the stats in terms of the deals we completed last year, two thirds of those deals were deals where it was someone in the same sector buying another party. So I almost a competitor. You’ve got to really just sense check what you are handing over during that process because due diligence will be phased. There’ll be an initial kind of assessment period where the buyer will want to fully understand how the business works, how it trades, what the numbers look like. A lot of small businesses don’t publish and advertise detailed accounts, so the buyer might not have a full grasp on exactly how trading performance looks. So again, you’ve just got to keep that in mind and that’s why I’d always say to people, when you get that, knock on the door, take a step back, catch a breath, seek advice, speak to those who do this for a living, because it’s very easy to spend a lot of time, spend a lot of money, be distracted for a period where you could end up in a position where you don’t want to be.

Yeah. And as you say, you’re only going to sell your business once. For most business owners, they’ve built their business up over a lifetime and it represents their life’s work. And a lot of them are out there thinking that, hey, I need the sale of my business. Hopefully I can actually sell my business, it’s saleable. And they’re thinking that when they sell their business, some of them, that is the bulk of their pension provision. And so hopefully we get there. So we want to maximise, they want to maximise that opportunity and some of the concerns we hear is when they start these conversations is, well, what do I tell them, especially if it’s someone already operating in the same sector, because I guess a bigger player, it’s not beyond them to use this as a strategy to just pick up some market intelligence.

Absolutely, and we do see that quite a bit. Unfortunately, there are a layer of buyers who are out there with not the best intentions so you’ve just got to be, again, methodical. You’ve got to be careful with what is shared and how it’s shared. Again, as a starter, even a conversation like this, before anything is distributed, let’s get nondisclosure agreements in place. Yes, it may only be seen as a piece of paper, but it’s quite a powerful piece of paper and it’s a reminder to both parties that what we are talking about is in confidence and this cannot be used or shared for anything other than the purpose intended.

Yeah, and if you’re only ever going to do something once in your life, you want to get it right. So now is not the time to skimp on paying your corporate finance partner, paying an exit planner, paying your financial planner or a legal advisor for good, solid advice. You’re only going to do this once. Ask them, how much information should I give them? At what stage? What do I need to do to protect myself?

Like you’re saying there, how do I know that they’re not just sniffing around looking for information? How do I know that they’re serious? And if they’ve been approached, they’re possibly feeling a bit flattered and their ego has been stroked. So, yeah, look, it’s a critical time. So, Lee, when they get approached, I.

Guess there’s an element of seduction here and they’re going, hey, look, I want to buy your business in the UK, a certain amount of financial information for business is published. So they’ve got some financial information. Are they making an offer? And I’m just thinking of the real estate scenario. Someone comes in and says, a real estate agent will say, well, I can sell your house for a million quid.

And so we engage those people to sell our house for a million quid. And then they go, oh, look, I misread it and I’ll get you 800 or whatever the story is. What’s happening here? Are they making high offers to seduce the owner and get their attention? And then going, well, now I’ve done the due diligence. Here’s what I can really think your business is worth.

I think you will find some buyers do that. And again, I think if a buyer is doing that, you’ve got to challenge them. Due diligence is key, and due diligence has got to go both ways. So, Darryl, you want to buy my business? Who are you? Why do you want me? What do you know about me? Are you advised? Have you done this before? Do you have the funding? Funding is a key part right now because I think we can all see that we’ve been through a period where interest rates have risen, what, 14 times now? Obviously, hopefully they’re going to retrench a little bit now. But debt availability is somewhat difficult. The ability to raise finance is strangled.

So if someone comes in with a broad offer and they can talk with valuation very quickly without getting into some detail, and you’ve got to give them the benefit of seeing some information, because only then can they come up with what should be a robust and kind of deliverable offer. And as part of that, the one thing that I always say to my clients is valuation is one aspect which is incredibly important, but so is structure. Very few deals these days see the entirety of the consideration payable on completion. That tends to only happen in a transaction where there is a strategic purpose for a buyer to acquire the target.

So again, you’ve got to get into the nuts and bolts as quickly as you can. So one of the things I would do is when you’re getting to the kind of offer stage, or the heads of terms, as we would call it, that heads of terms should include the list of assumptions that the buyer has made to derive the offer and present the offer that they have, because that should indicate the areas that they are going to diligence. And what I would do is, if I was selling, is, I think, right. Have they made the right assumption? Have they picked this up wrong? Because if they have, you need to be communicating there and then, because what you don’t want to do is spend weeks, months following a deal which cannot get there, it will not deliver.

Yeah. And there’s mismatched expectations. You’ve got to get on the same page quickly. And I think what you’re saying there is, you’re kind of saying, show me the money. Show me that you’re serious, because we’re spending six figures plus seven, eight figures. Sometimes there’s some massive deals. No one’s going to go and spend that amount of money on a business unless they’re really sure. So they want to do the due diligence.

But you up front, you need to. Make sure that before it’s going to take a fair bit of your time. So you need to know that both parties are serious and entering into this with, I guess, pure mind and looking to do a deal.

For sure.

So, Lee, what do business owners need to do? If they’re just running their business on a day to day basis, they have an exit, or they want to sell their business at some point in time. So they’re not actively, let’s say, shopping it around, or they haven’t engaged a broker or an M&A person to actively promote their business for sale. But what could they be doing to put themselves in the best possible stance or situation? If someone does come and knock on their door with the unsolicited?

It’s a great question, and I think it comes down to one thing, and that is preparation. So put yourself in the shoes of the buyer. What is the information they want to see so clearly? Financial information is going to be needed. That needs to be accurate. It needs to be up to date. Both concepts which are so, so obvious, but for a lot of small and medium-sized businesses, where it might be perhaps that the finance function is outsourced, it might be that you’ve got part time personnel. So there can be a bit of a lag between the accuracy and timeliness of financial information. And that is something even just from a general best practice perspective, you need to have kind of your hands on similarly, forecasts.

Do you have any forecasts, those forecasts? Is it a profit and loss? And does it include a balance sheet, cash flow statement? Because again, if a buyer is going to use debt to support the purchase price, they’re going to want to look at the surfaceability of whatever incoming debt looks like. Simple things such as your records. Do you have the latest up to date employment contracts of all of your staff? Do you have your supplier contract, your customer contract? It’s very easy to not file or misfile pieces of paper, which could be very, very key during a process. From a customer contract perspective, it might be that there are certain termination provisions on change of ownership.

You need to check what’s in there, because again, from a commercial diligence perspective, it’s something that a buyer is going to look at. Do you have an organisation chart, again. Linking back to your key employees? How are they locked in? How are they incentivised, especially if you are a smaller business?

One of the key risks with a smaller business is dependency on a small number of individuals. So if a buyer comes in and they lose one or two staff, what does that do to the viability of the business? What does that do to their projected return on investment? So in essence, it’s just keeping your. Files and records up to date on hand.

And again, when you get to the point of sharing information, just think how much do they really need to see? So again, if you are giving a profit and loss balance sheet, if they ask for things like customer lists, that may be something that you anonymise at the front end. But again, I would always cross reference that to what you publicly disclose. So quite often on a website, a business will have case studies, testimonials, a list of customers they’ve worked with. Well, if the information is already there, you might as well give them it now, because again, what we want to do is put them in a position where they can produce a well thought and highly deliverable offer, which you can then fully assess in the round.

Yeah. So if I was to summarise what you’re saying there, I think what I’m hearing is one way to prepare is to demonstrate to a buyer, potential buyer, that you’re in control of the way you’re running your business. You’re running it to a plan, and you’re not just making it up as you go along. It’s not all in your head. You’ve got some sort of documented plan and you’re capturing. So you’ve got forecast and then you’re capturing results against the plan.

And I guess you’ve got some business planning strategies in place and your management team, they’re not just running it from inside their head. So if they leave, those key people leave the systems, the processes, the workflows are in place for someone else to pick up and hopefully be trained on

Correct, absolutely.

All de-risking it.  Okay, so what would make a deal like this fall over? Let’s imagine we’ve got our paper, we’ve got our information in place, we’re ready for a due diligence. We know where all our contracts are. We know where all our agreements are. We’ve got our policy and procedure manual, if you like. We’ve got our HR manual. It’s all stored in our filing system. We know where we can put our hands on everything. We are running our business with some financial acumen and runway we’re doing for. What else do we need? What would make a business fall over if we’ve got all of that tangible stuff at hand?

Well, I think one of the facts that I will always point out is if a business is going to fail after an acquisition, it tends to be in the first twelve months post deal. What a buyer will want to see is can you maintain and sustain whatever good practice is in house and ultimately led you to the decision that you want to purchase. So again, key staff, can you keep them in? That’s why quite often what a buyer may do is look at new ways to incentivise those key employees who perhaps from a financial perspective, weren’t incentivised previously. So things like loyalty bonuses can be quite useful. Similarly, from a sector perspective, regulatory change. Do you understand the market that the target is in? This is again why two thirds of businesses per hour stats are bought by those who are already in the sector. They understand the headwinds, they understand the challenges. I think if I was buying, one of the obvious areas I would look at these days is the client mix. And also what sectors are the clients in? So if you were buying something right now, which was serving the construction sector. Or retail, you might be a little more reluctant than, say, if it was serving a different sector, such as security, which is quite buoyant right now. Supply chain, how locked in are the suppliers? How important are the suppliers if you lose one, how replaceable are they? I mean, fundamentally, and it comes in on a raw financial level, what we look for is sustainability in profits. So what are the torpedoes that could come from left field, which could really rock the boat, sink the ship.

Yeah. So have we done sort of risk analysis and assessment and got a business continuity plan and you mentioned about, I guess, the 80 20 rule on client base. We also need to do that on our supplier base as well, which is often overlooked.

Okay, so we’re having a look at the robustness, the sustainability of all of our systems, our business model, from client acquisition all through the revenue chain, so to speak.

So we’ve got our business in place, we haven’t taken it to the market. What sort of buyers, potential buyers are typically, in your experience, sort of making these approaches, are they more the people in strategic acquisitions? Or is it more, I guess, a trade sale or a competitor just trying to buy out market share?

I think again, one of the comparisons I make is you’ve got sophisticated buyers. And those who aren’t sophisticated. Unfortunately, we are in an environment where there are a lot of unsophisticated buyers who think they can go out and pick things up for a penny, for a pound without putting any capital in. That can sometimes be possible, but I certainly wouldn’t want to give my business away for a penny or a pound. So you will see a lot of that, because again, if you look at the public information out there, it’s not very hard to find a list of companies in a certain sector, a certain area. It’s not hard to find business owners of a certain age where a retirement sale is perhaps more likely. So I think we have a lot of clients that receive a ton of approaches, especially linked to their age, because you do get people who can smell blood, they can smell a deal. Now, strategic buyers, that’s what you want. A strategic buyer needs you for a specific reason. And they tend to be the most viable option and also the option which is going to deliver best, most value. So they tend to be a bit rarer. A strategic buyer often is already known to you. It might be that you’ve got a certain product, a certain piece of IP, certain jurisdiction or geography that they don’t have and they want. Which is why sometimes you see overseas buyers stepping in because they need to be in a territory which they can’t, maybe for accreditation, regulatory purposes.

I think private equity are an obvious reference point here, because if you look at the stats, the Financial Times in December 23 talked about dry powder of 4 trillion. That dry powder needs to be deployed. If a private equity house cannot deploy that cash, they need to give it back. That does not look good and that will derail their own ability to raise the next fund, which is where they make their money.

So PE will be active. But private equity involvement is not always direct. What you might find is you might find a trade party approach you, but it is the private equity capital behind which has prompted the approach. Because if you look at private equity, they are financial investors. They buy at one price and sell at another.

The second price has got to be higher because that’s how they deliver their return. That price becomes higher through growth, through expansion, which will be both a combination of organic and acquisitive means. Now there are benefits to trading with people or transacting with people with private equity money. Because you know, they’ve got the financial wherewithal to execute. But again, when private equity step in, they tend to structure in a way which will try and lock in management and the vendor.

So are you happy to hang around? Will you stay and work with the business? Are you happy to see some of your payment linked to a future transaction? So again, I think when it comes to private equity, it’s very glamorous, sexy. Everybody wants to do a PE deal, but there’s a lot that goes into it and that is one area where you must seek advice very quickly.

Private equity are much bigger deals too, aren’t they? And they are really two bytes of the cherry. It’s a specific type of exit. But as you say, when business owners aren’t aware of how private equity works, it just sounds really sexy and appealing and they hear the big numbers being thrown around and they can get seduced by that, but it has a big impact on the way you run your business. And they want their pound of flesh, they want fast growth, and if you thought you were running fast before, they want you to start sprinting. But it’ll be a hell of a ride.

No, it is. And again, I think if you are in that position, the benefit we have these days is there is probably more private equity houses than ever was before. I think you can afford to be a bit more selective. You’ve got to look at the house in question, what’s their style, who are the people you’ll be working with? What are their financial expectations? Crucially, what’s their timeline? So if they’re going to buy now with a view to selling in X. Years, how long is X? How does that work with your own timetable, does that work or does it not work?Also, remember this, private equity investors, when. They invest, when they deploy into you. It’s not just equity. The larger proportion of the funds they’ll allocate will tend to come in the form of debt. That debt needs to be serviced. It might be that the interest on that rolls up, ie. You don’t pay it on the way through, but on the future transaction, that’s got to be paid off first. So that will ultimately impact the returns. That flow to all other shareholders. So just keep that in mind.

Yes. Okay, so we’ve got, our private equity is potentially one option, because the private equity, they’ve got all this money that they need to invest, and that’s been happening for a number of years, as I understand. And so they’re getting, let’s say, more and more keen to invest that. So they’re out looking for opportunities. They may tap you on the shoulder, a competitor may tap you on the shoulder, and they may be doing market research, but they’re just looking to buy up some customers and grow through acquisition. So they’ll just want your customers, and there may be one or two others. And there’s these people out there attending courses and think that they can become business buyers and buy your business for a pound. So if we’re on the front foot and we’ve got business owners educated, they’ll know how to handle those sort of offers. But in this scenario, Lee, where someone comes and they make a serious offer to our business, because we haven’t potentially, the business owner hasn’t been out there looking, and they’ve just got that gut feel of what businesses in their industry sell for. How do they know if it’s a good deal, a good offer that’s being presented to them?

Yeah, great question. And I’d put it down to four things. Valuation. Is that a number that you are prepared to sell on? Number two, structure how and when is it going to be paid? Assuming that it’s not all going to be paid on day one, how long do you need to wait for that capital? Are you being offered security to support that? Is that security actually worth its weight? What conditions will apply? Earnouts are a transaction type or a payment mechanism whereby future consideration is linked to the delivery of certain targets. Are those targets deliverable and crucially, within the minutiae of the sale and purchase agreement, what control do you have on the other side and what can the buyer do to manipulate the achievement of those financial targets?

That’s one of the biggest ones that I’m talking to owners all the time is going get your business prepared ahead so that you can do a deal without the need for an earn out. There can be deferred payments and you can have structures in place. But I’ve just seen too many examples where they agree to an earn out and then the goalposts are moved.

And I think in this environment, where, again, if you are to assess the sustainability of earnings, it’s very difficult to fully understand and conclude what is deliverable every single year because we’ve had Covid, we’ve had the post Covid bounce, we’ve had political, complete trauma, we’ve got conflict. There’s a lot of factors, a lot of headwinds which impact that. So quite often, earnouts are used to align a buyer and a seller when it comes to valuation. But what we’ve seen in the last twelve months is actually valuations and multiples have held where they drop it tends to be where a seller has said, I appreciate the buyer’s suggested use of an ear note. I’d rather avoid that risk. So I’ll take a little bit less. I’ll take a little bit less now, just for certainty, just for clarity, again, this kind of ties in with the kind of last two factors that I’ll draw your attention to in terms of what looks good.

The third being fit. Does my business fit the buyer? Will that work? I’ve got some staff that have worked for me for 2030 years. Are their jobs safe? I’ve got some supplier relationships and customer relationships. Are they going to look after my clients and suppliers the way I have? And the last and the most important is, is the offer deliverable? Have the ways, the means. I mean, again, it comes back down to something we’ve discussed earlier, but one of the things you always need to watch out for is, is the buyer taking advice? And are they happy for you to take advice? Because if not, it tends to be a warning sign.

Yeah. So that’s really good advice there, Lee.

There’s a lot more factors, I’m sure, like selling your business and being prepared for an unsolicited offer is one thing, so you’re responding. A lot of business owners, I think we started the conversation going, it’s a dream scenario, isn’t it? A lot of business owners think if they just keep growing their business, they’ll create more and more awareness in the marketplace, they’ll get noticed, and they’re just hoping that one day someone will come and tap them on the shoulder. But what can they do specifically because to attract attention, what can they do to attract offers without sort of running around the marketplace going, we’re for sale, we’re for sale, because no one wants to do that. That’ll de-stabilise the business. But what can they do to prepare themselves to attract people, office, out of the blue?

I think it all comes down to profile. So again, if you look at your online presence, your online footprint, is your website a true depiction of who you are, what you do? Is that website as polished as you’d like it to be? Everybody will google everything, so just make sure that looks as good as it can do. Again, do you make use of press releases?

Do you tell the market how good the business is and all the great. Things you are doing? It’s one thing that I do in my business, and it does lead to opportunities. Your advisors, your bank manager, let them be a sponsor an advocate for your business, your brand. Let them go and send a message. Bearing in mind they might often speak to parties who have a strategic purpose to acquire that buyer might not know who you are. Maybe they could join the dots, link you together and all of a sudden, a deal comes from nowhere.

Leverage your network. Lee. Look, this is a topic that’s near and dear to my heart, and I’m thinking we might have one or two follow up conversations and perhaps episodes on this. But for the topic today, I think let’s try and summarise what we’ve captured so far. If you want to be attractive, to get those offers, you need to make sure that you’re on the front foot and ready to go for that unexpected contact.

You need to let your network know, you need to subtly, you don’t want them to be singing, but let them know that you’re open to entertain ideas. You need to make sure that you’ve got the right advisors on board ready to go, whether they be financial, whether they be legal or personal financial planning. You need to get your personal financial planning affairs in order. And you need to know that your business is both culturally and commercially ready and adaptable for growth and sustainable growth. Is there anything we’ve missed there?

No. I think the one thing that I will say is, if the approach comes, stay calm, be methodical, challenge. We’ve used the phrase already, but due diligence has got to go both ways. Don’t be afraid of asking the difficult questions on the buyer. You need to be comfortable and confident that this is the right party to buy your business and this is a party that you’re going to spend some time with, both in the build up to the sale and potentially on the other side.

Yeah. So do all your preparation up front. I love that. Stay calm and then ring up your advisor and go help. You’ve done this before. Guide me through this. Lee, humble. Thank you. I really do appreciate you sharing your exit insights with us today.

Thanks so much. Cheers.

About Lee Humble