Receiving an unsolicited bid for his electric car charging start-up HaloIPT prompted Dr Anthony Thomson to put the brakes on his long-term growth plan.
“We were 18 months old, doing a £20 million Series A funding round and talking to potential strategic investors in the automotive sector such as General Motors. We then bumped into mobile chip maker Qualcomm who also wanted to be part of the consortium,” Anthony recalls. “As due diligence progressed Qualcomm got more and more excited and decided they wanted to buy us outright. It had been our intention to exit in around 5-7 years so the offer, which was a big chunk of cash, really threw us. We weren’t ready for it.”
Anthony and his fellow directors went into “navel-gazing” mode, deliberating over whether now was a good time to sell or to continue executing on their business plan with all the unknown risks, competition and hurdles that could lie ahead.
“We ended up selling to Qualcomm, but we were slightly unprepared. The due diligence for a raise compared with a sale is quite different in the level of information you need to provide. There were a lot of late nights,” says Anthony, who now, as Chief Business Officer of business advisors Elephants Child, helps other growth firms deal with unsolicited approaches.
“It tends to start with a phone call with a junior manager declaring that they have been looking at your company for a while and that you are very impressive,” Anthony says. “It’s flattery and it completely changes your thought process. Owners forget that if they had planned to sell their business they would have gotten nicely prepared beforehand. They’d oversee the whole process, including the timing, which would leave them in a stronger position to achieve better value.”
This emotional response often leads to owners agreeing to quickly meet with the potential acquirer and giving away far too much confidential information, such as detailed sales and growth forecasts, employment and customer contracts, and IP.
“If you are minded to, then agree to have a high-level meeting but don’t divulge anything confidential. Find out why they want to buy you and what their long-term intentions would be. You don’t want to sell to a Gordon Gekko who is going to cherry-pick assets and sack your staff. You want to find a business with synergy, expert staff or a strong, unique product,” Anthony advises.
Peter Kroeger, principal at KLO Partners, also says it is worth chatting with a bidder and getting a non-disclosure agreement before an initial meeting.
“Determine whether you like them and if you can trust them. How will your business fit in with theirs?” he says. “Talk about your vision and why you are succeeding but not your customers, suppliers, margins or prices. Also, find out as much about them as you can from sources such as Companies House.”
Peter says that an agreement should be made whether to continue with the process at the end of the first meeting. “But it is ok to say you want to think about it,” he adds. “If you do agree, don’t be hasty in setting up the second meeting. Leave it two or three weeks and then appoint an advisor to start the selling process.”
Peter says owners, if they feel unprepared for a sale, can also suggested an even longer delay. “On many occasions I’ve seen owners say, ‘We really like you, but can we put this deal on hold until we get our house in order?’ The acquirer usually says yes because even though they may end up paying more they will get a much better business. It can take up to three years because there is so much to do, such as sorting out your paperwork or adding new management or more customer spread,” he says.
To avoid this and to be fully prepared for any offer when and if it comes, owners need to change their mindset and processes.
“Most owners never think about an exit until their mid-50s, so they are never ready for sale. They are nowhere near.” Peter says. “But they all see their business as their pension pot. They expect to sell at some point so they should get themselves ready whilst they are growing.”
Anthony agrees and advises owners to create a ‘data room’ to help focus the business. “If you are not prepared for a sale you might find that an NDA expired last week for a particular contract or that 15 employees all have different terms and conditions. A data room is a virtual room full of documents such as shareholder agreements, board meeting minutes, cashflows, forecasts, sales models and product descriptions which are up to date and regularised,” he explains. “Build the room and gently populate it so if a bidder does come along then you are ready. They won’t find any nasties in there to drive the value down and you’ll be able to be rewarded for your hard work.”
The opinions expressed by third parties are their own and are not necessarily shared by St. James’s Place Wealth Management.