Podcast: Selling your business
Podcast: Selling your business
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Richard: Let's start right away on the subject of psychological pressure before the sale. Rachel, what's your sense of what owners go through in the run-up to an exit? What's going on inside business owners' heads?
Rachel Bridge: It's actually an incredibly emotional experience. They have started this business from scratch, often. They've created it. They've raised it. They've nurtured it. They've devoted every waking hour to ensuring it's okay. They've loved it, even when no one else did. Their business is, essentially, their baby. Even if it logically makes sense to hand it over to someone else, it's incredibly hard to do. They're just so bound up with it, and it's just taken up so much of their life. It's a really, really hard experience to hand over, and the business isn't just the product or service, it's the employees too. Often, it's like a family. It can be incredibly just to walk away.
Richard: They are in the run-up to the sale, so they're probably under a great deal of pressure to continue very successfully and to meet numbers and so on. Are they engaging with that impending change, or is it just something that's just looming?
Rachel Bridge: It's interesting you should say that. I've just spoken to an entrepreneur who's just actually gone through the process of selling their business, but they said, actually, they should have sold it two years ago, but they were just so frightened of what lay ahead, of what it would involve, of what the unknown would look like. They just were very, very scared about trying to sell it, and doing it in the right way, and making sure that they sold it to the right people, and got the right price, and didn't forget anything important. Huge fear-factor and that literally kept them not doing anything for two years.
Richard: Andrew, I know you've spoken about this issue of psychological preparedness. What's your take?
Andrew Towers: I suppose, Richard, Rachel touched on this, an element of the guilt, but it really depends on the stage where the business owner or key stakeholder is at, in terms of the actual process of when they've actually exited, or whether they've exited before, because that is really instrumental, in terms of what they do next, and in terms of how the process evolves. So, for example, a serial entrepreneur, who's been through this process a number of times, will deal with the process very well and it can be very cut-throat.
Whereas, a business owner who's been in the business, and, as Rachel mentioned, who may have been part of the business for a number of years, then the emotional and psychological aspect of exiting that business is a lot, lot harder, and it's those conversations, whereby we can start to open up some of the things that they want to do afterwards and understand what the rationale is for them exiting the business, which is really, really crucial, in terms of what happens next.
Richard: Let's move on now to when the deal's done. What are the big issues here, again, on the emotional side? Rachel, what's your sense of, at this point, what people are experiencing?
Rachel Bridge: At this point, I think they are, it would be very different, obviously, whether they have decided to stay on or leave. If they have decided to, literally, leave. They feel very guilty, actually, because they're leaving the people behind. All these employees that they have nurtured, that they have been with, often 20, 30 years sometimes, they're walking away. They're saying, 'Bye, I've just sold you off, and off I'm going now, and I hope you'll be fine, and I've got this big pot of money.' Very, very guilty. Very, very worried.
Equally, if they've decided to stay on, perhaps they've sold the business and they're staying on to run it for a while, that's also fraught with difficulty because their employees have trusted them that they're making the right decision, 'Hi guys, we're hitching our carriage to this train and we're going off in this direction. It'll be fine.'
And then they have really got to deliver on, actually, will it be fine, because there's a different owner in charge now, and they could have very, very different ideas, and there's that whole loss of control that the entrepreneur has about where is this new train heading, and it's not just them on the train, it's all the employees that they have promised it will be fine. So, there are huge conflicting emotions going on there, and it's really hard for people to deal with.
Richard: If someone's a serial entrepreneur, presumably, they're quite familiar with some of these shifting relationships, but I guess, these acute problems, where, for example, you've got a business, which has been, say, several decades work, and there's not been an experience up to that point of working with investors or partners or others. This is just completely new. Is that right? I guess they're in a different category, slightly more alarming, perhaps?
Rachel Bridge: That's right. I'm sure it gets easier with time, but certainly, the first sale, and possibly the second, because you have got these people that you like and you trust, and that's why you employed them to work in the business, and they are literally putting their livelihoods in your hands, and that is really hard to deal with. Even if you're confident that you're making the right decision for the business and for its future, you are taking a lot on to manage all their expectations and how it all plays out. That's before you even consider how you are fitting into this new arrangement.
Richard: Rachel's spoken about employees and colleagues, but what about family businesses?
Andrew Towers: The family business element, adds a different dimension to simply a business owner with employees to consider, because when there are family members, either involved, or potentially could be involved in the future, then the elements that Rachel speaks about, in terms of guilt, definitely come into play.
It's then, almost an assessment from the business owner to see, first and foremost, what potential offers could be on the table, what the business valuation is, and secondly, whether they see anyone within the family unit to actually take over the reins, and crucially, if not, then this is where the actual process to start a potential exit from the business begins. This can be extremely difficult for a business owner who maybe feels that they're taking away a potential future from some of their children, and continuing the actual family business.
So, this is extremely emotional from what I've seen, and I've seen a process go, almost over the line, a business that we worked with in Wales which was a nine-figure sum, and they were two of the smaller stakeholders, family members, siblings, and right at the wire, the business owner couldn't do it. He couldn't sell. He pulled the plug because he didn't want that guilt to take away the opportunities for members of his family, in case one of his sons, in particular, who he felt could take over his role. It's extremely, extremely pressured, and emotional at this stage.
Richard: In a nutshell then, it's down to the factors of how the ownership of the business is spread about the family, and also how much interest there is amongst family members to carry on?
Andrew Towers: Absolutely. Richard, on that point, with this particular family, the two of the stakeholders, the two of the siblings, had smaller stakes in the business, and their drivers to exit were completely different to the key stakeholder. Their drivers to exit were that they didn't want any element of the business anymore. They wanted to pursue other activities and hobbies, whereas the business owner, his pure passion was the business. That's been his life for 30 odd years. So, yes, it's understanding the dynamics of each of the different family members, really, I suppose.
Richard: Rachel, just coming back to you on another aspect of this. Could it be another scenario involving colleagues, for example, where your loyalty to the colleagues is actually a factor in pushing the sale forward, because you're going to be a beneficiary of a transaction, but also some of these others are too, and they may have their own personal or family needs for that money as well? So, you're trying to weigh up that positive outcome, potentially, as well as some of the negative ones, that you've outlined?
Rachel Bridge: Yes, that's a really good point, Richard, and actually that can be a great way of actually going through this transaction. If you are in it together, as it were, with perhaps, your senior management team, and you're all going to benefit from doing this, that's a great way of actually pulling together, but, indeed, if they're all itching to realise their stakes, then you've really got to make sure you're doing this properly and selling it to the right people, in the right way. Huge pressure.
Richard: Again, I guess it comes back to this thing of preparation. Somehow, if you are going to face these anxieties and torn loyalties, some of them can be addressed ahead of a sale by structuring it in a careful, thoughtful way.
Rachel Bridge: Oh my goodness, yes. Preparation is absolutely the huge secret to making this right. You've got to have conversations with people. You've got to find out, actually, do your family members want to keep being part of this business, or actually, would they be pleased to leave? Do your senior management team, perhaps, they might even want to buy it themselves through an MBO? You never know.
You've got to talk to people. You've got to find out, and you've got to do as much research as you can, and think about it. Do you want to stay on and run the business? Do you want to leave now? Does your senior management team want to leave? You can't assume anything, and that's the key thing, you've got to dig, dig down and find out what is going on in people's minds around you. What do they want to do? You can't make any assumptions here, and that's why preparing and having those conversations well in advance is crucial.
Andrew Towers: Absolutely, I totally agree with Rachel. In terms of the actual valuations of the businesses though, this is where some of the deep discussions we will have at this stage when we're fortunate enough to be in front of clients at this stage of the journey, this is where we need an understanding of what the actual valuation of the business is likely to be.
At this point, this is where the business owner will know whether that number is right for them, and if it is, the process can start, and if it is not, then it may mean that it drives them back into the business for another couple of years to drive the value higher, which means that they'll be able to exit and be able to sustain whatever lifestyle the business has provided them with.
So, there's a lot of different dimensions at this point, that have to be understood, over and above the actual valuation, I suppose. Equally, what should have happened beforehand, is that ability to play Devil's advocate. That ability to ask the right questions. That ability for them to understand exactly what it is, or why, first and foremost, it is that they're selling and then what it is that they want to happen next, and importantly, not just from a personal point of view, but from a family point of view, and also, more frequently, a philanthropic point of view as well.
So, it's those three elements that really drive what happens next, and crucially, as well as, the time that is afforded to the actual seller after the transaction, to just have some time to think. One of the things we say to them all the time is, not to rush into anything, which is why it's so common for us to have balances just left in cash for six months to a year, so they can understand how they feel, first and foremost, and then move on to what happens next.
Richard: Rachel, over the years, what have people confided to you about this topic - the issue of sudden enrichment that arises at an exit or part exit?
Rachel Bridge: One of the key things that make it easier for people is, if they are sharing it with some of their employees, perhaps. One of the entrepreneurs I know well sold his business, and he presented his PA with a cheque for £250,000. Out of the blue. A life-changing sum of money, because he said, 'I literally couldn't have done this without her.' That's wonderful, isn't it? What a joyful thing to do.
He was so happy to have done it, and obviously, she was pretty pleased too. To share and to acknowledge and recognise the hard work, so actually, many entrepreneurs have either informal or formal share ownership schemes, so you're sharing the benefit, which I think is a really great way of dealing with that whole, 'I'm walking away with billions of pounds.' But actually, the money thing is interesting.
Take the Rich List, for example. Sometimes selling your business can literally propel you straight into the Rich List. Some people love being in the Rich List and they're fighting to get on it because it shows you have achieved something. Equally, about a probably equal number of people are fighting to not be on the Rich List, because they feel guilty, I suppose, and embarrassed about just how much money they have made, because often if you're selling a business, it's not just a small amount of money.
It could be huge amounts of money, and the shock when you have spent years living frugally to raise your business because everything you've earned has gone straight back into the business, the shock between that and getting a life-changing sum of money, is huge.
Andrew Towers: Rachel makes some really valid points in terms of the fact that this can lead to real elements of self-doubt and depression on the back of your life's work, but equally, we should look at the flip side and the positive nature of things that can happen after an exit. Where this has been thought through, we've seen business owners help out family members. We've seen business owners set up philanthropic trusts. We've seen business owners help children through university and through studies.
We've seen them mentor individuals in the sector of business they've been involved in, so we've seen real elements of personal growth on the back of this, and this is something that can lead to inspiring the business owner post-exit as well, and interestingly, it's something that, again, is quite frequently, something that they pursue as almost their full-time job post an exit. So, it's hugely advantageous for them.
Richard: Psychologically, are people prepared for the change that a big capital sum could mean for their lives? What does that mean for them, in terms of adjustment?
Andrew Towers: This is where it's hugely important this stage for the business owner, for the key stakeholder, to actually start to understand what that pot of cash can actually make them, in terms of an income. Capital growth. What lifestyle costs they need. What structures that need to be invested into. What I mean by structures is structures for tax efficiency, so, effectively, we're trying to replicate, at this stage, the dividends and income salary that they've been taking from the company.
That needs to be replicated first and foremost to support ongoing lifestyle costs, but the psychological shift at this stage, and I touched upon this earlier, The psychological shift for many, when they see the cash transfer from their corporate balance sheet onto their personal balance sheet, can be, at times, significant. I've had people on the phone to me asking me how safe banks are because they're scared that this money is going to disappear. So, it's going from having a paper transaction to an actual valuation that's physically in your bank account, and there's almost an addiction in the early days of going online to check it's there, continually.
This is where a process of actually working with a wealth manager and understanding how the money can be invested, the cash flow that can come from that money, and also, how that also links with whatever transfer of assets to future generations or to philanthropic drivers is crucial.
Rachel Bridge: They really do need as much help and support as they can get, because what they think they're going to do is very different, in the end, what they want to do. For example, one entrepreneur, she sold her business for, I think it was about £20 million, and she immediately arranged for her and her family to go off on a luxury round the world trip for three months. She'd dreamt of this. All those years of slog, this was actually going to be the pinnacle, 'Right, we've got the money. Let's go on a trip.' She hated it. Two weeks later they came home. She was so bored, restless. Absolutely hated it. So, sometimes what you think you want, you actually don't and you do need some guidance with that.
Richard: Andrew, I know you have some strong feelings on this, because it echoes some of the things you've mentioned to me, which is this lifestyle adjustment, that there's perhaps, a sense that people need to crank up their lifestyle, whereas, in fact, they discover that's not really what they wanted. What do you see, Andrew, amongst your clients, and how have you helped or spoken to them about this?
Andrew Towers: This again comes down to how quickly a business has been sold, because as you can imagine, a business that may have been in existence for 30 or 40 years, they've taken chunks of dividends out of that business on an ongoing basis, so they've already got the lifestyle that they may have wanted to achieve from the business sale. When we see businesses that sell very quickly, where, perhaps, everything has been invested within the business and very little has been taken out, then we see a shift with a number of people, whereby, the lifestyle becomes almost a perception of how they think should be living.
This can cause a number of different psychological issues for them. There can be elements of semi-depression because they're trying to live a lifestyle that, perhaps, they're not comfortable with, or that they think they should live.
Rachel Bridge: I think that's a really good point you make there, because, of course, that's what's so surprising and shocking to them, because when they started this business, they were probably on their own, in the spare room at their laptop. When you start a business you're often on your own, literally or physically or mentally, for a long time. It's a one-man band, really, that you're ploughing this lonely furrow, and gradually, as you've gone along the journey, you've accumulated all these people. That's what it is, isn't it?
Suddenly, yes, you are running this whole team and that can be really quite hard to get your head around, the fact that you are responsible for all these people, and that doesn't really go away.
Andrew Towers: I think a really nice way of looking at this, for the majority of business owners is that invariably this is actually cashing out their life's work, and they see the money, or they see themselves as simply a custodian for this wealth, and it touches on some points I made earlier around what the power of that money can actually do. First and foremost, once they know that their lifestyle can continue for the remainder of their lifetime, then it moves into the much deeper elements of philanthropy and doing good, and that's where the power and purpose come from, for a number of individuals, post-exit.
Richard: People aren't doing this for the money really are they? They're doing it for the thrill of a business creation. It's built into them. It's part of their DNA. These are people with a particular kind of drive and creative energy.
Andrew Towers: I do see that side, but equally, I think we always forget, because of the fact that the headline grabbers are the Elon Musk's of this world, and the new tech entrepreneurs and unicorn builders, but actually the business owners that have devoted their lives to creating something truly special for the past 20 or 30 years, the drive for them is just to create something fantastic. To create something that they truly believe in. To create something that their family will be proud of. To create something that they're proud of. It's not necessarily about the ongoing energy and transactional basis of the new modern entrepreneur.
Rachel Bridge: Quite a lot of entrepreneurs are desperate to get that feeling back again. It's the ultimate high, I think, isn't it? Creating a successful business, and suddenly it's all taken away, and they ask, 'Who am I? What's my purpose? What am I doing?' So many of them go back and start another business, either rightly or wrongly because they just miss that so much, and it's so ironic, isn't it? They've spent years building up to the sale of their business, and then suddenly there's this great big business-sized hole in their lives, and they want to go and do it again. Maybe, for some, that's the right decision, but for others, it's not the right decision. They just happen to be in the right place at the right time with the first business, and you can't necessarily replicate that.
I know, in particular, of one entrepreneur who sold his business very successfully and has spent the past 10, 15 years searching for the next thing that will fill that hole in his life, and he hasn't yet found it. It's not about the money. It's about achieving something. Creating something, and that whole sense of them against the world, really, because when you're starting a business, often people think, 'That's a ridiculous idea.' And you're proving that you can do it and that adrenaline and excitement. That's what people do it for, and it can be very hard when it's gone, and some people are very successful at being serial entrepreneurs and they're basically searching for that next high. That next feeling of achievement, but I would bet that it's the first one that is the biggest and most amazing feeling.
Richard: Can you give me an example of one or two of the more surprising questions you've been asked, or glimpses you've been given into aspects of their lives? Rachel.
Rachel Bridge: I think there are two things. I think, firstly, the surprise to me is the extent to which people don't understand what selling your business means. They go into this process. They just don't have an understanding of what it all means. For example, one entrepreneur sold their business to a private equity firm which was absolutely the best thing for the business, and he knew it was the best thing for the business and it has subsequently thrived, but he didn't really see it as selling his business. He literally saw it as I've taken on some investors.
So, on the one hand, you've got the private equity firm buying the business and seeing it very much that that's what they were doing, but the entrepreneur had totally failed to understand that, and he was just thinking he was getting an investor in. That's a fairly fundamental disconnect, isn't it, between two sides of that conversation? That was purely down to not enough preparation. Not enough understanding. Not enough conversation ahead of time, and I think just the other thing that does surprise me, just coming back to this whole idea of what happens next, is just that huge sense of, 'Who am I now? What is my status?'
Often entrepreneurs, when they've sold their business, they'll coast through the next year quite happily, because people will ask them to speak at conferences or they might get put up for awards, or people might write about them in the paper, and there's quite a little bit of buzz around, but after the year's gone, the next crop of people come up, and actually, they're now on their own. They're truly on their own, and that sense to which entrepreneurs, their identity is so much bound up with their business, and they perhaps didn't realise it.
I think that's the thing. They always thought, perhaps, that they could just walk away. I think that's so important for people to understand and to recognise and to put in place support to go through that process of actually understanding, 'Well, who am I now I've sold my business?'
Richard: Andrew, what in your mind sticks out as one of the more surprising issues or questions that you've come across?
Andrew Towers: I think time and time again, Richard, the most surprising question is, when you think of the huge sums of money that are often involved in these kinds of transactions, is, 'Is that going to be enough to sustain my lifestyle for the rest of my life?' And it's just helping them understand that transition from the corporate balance sheet mentality to the personal balance sheet, and understanding the different cash flow that can be generated from their personal balance sheet now that there has been that transition, but time and time again, it's always, 'Is that enough?'
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