At the beginning of 2010, Mark Bailey felt his health informatics business, Sciensus, had five years of growth ahead before exit.
By the end of that year, however, the company, which collected anonymised data on patients’ health for life science firms, had been sold to international healthcare group Healthcare at Home.
“I left a well-paid pharmaceutical job in 2003 to set up Sciensus. I had a wife who wasn’t working and two toddlers! But from the back bedroom of the house we grew the business, employing 40 people by 2010 and making strong profits,” says Bailey, the founder and major shareholder.
“It was always our intention to sell but we envisaged it being in another five years because we had the potential to grow quite large. But then a personal event happened where, because of a lack of suitable schools, we had to move my son into private education. To fund that we looked at taking equity out of the company, but decided a sale was the best route.”
Bailey carried out a mini-strategic analysis of firms to identify a core of three potential buyers. “We made tentative approaches. Some were competitors and some were parallel businesses,” he says. “I told some of the executive team about the plan but not the employees. The due diligence and acquisition process is complex and you need to pull off the trick of making the business be at its best when you are the most distracted. I didn’t want my staff to feel like that as well.”
Bailey sought advice from the Sussex Innovation Centre (which had been crucial to its growth), other entrepreneurs who had exited and legal advisers.
Mike Herd, executive director at the Sussex Innovation Centre, says high-growth businesses have to take a more strategic view of potential buyers. “For many conventional small businesses, exit tends to be a competitor who is buying the cash in the business and ongoing profit. However, for high-growth businesses, the acquirer may be more interested in the market access, client list, product line, intellectual property and management team,” he says.
“They are looking at the future profits that they can make from the company’s assets. The exiting company should be looking at how it positions itself to maximise its value. This may warrant a change in marketing campaigns to increase the visibility of future growth potential. Operationally, it may look at showing IT HAS the potential to expand internationally. Also emphasise a new product line through a pilot.”
Internal company focus can also help improve valuations. “When sellers value a business, they start high and it gets knocked down on the basis of perceived risk. A lot of the value can be retained by tightening up on process and paperwork,” Herd says. “Poor discipline with employment and sub-contractor agreements can damage a company’s IP position. Poor financial records may indicate current forecasts are not to be believed.”
Plan for exit early
Rupert Beazley, partner at CMC Partners, says entrepreneurs should start to think about exit soon after formation. “Nine out of 10 entrepreneurs think it’s like selling a house,” he says. “But it can take two or three years of preparation if you want to get the maximum return from your investment.”
He says advisers can help by pointing sellers in the right direction. Sellers, he explains, in general need to show a rising trend of profits in the last three years’ accounts, improve recurring revenue, reduce the reliance on a small group of customers, have a clear ownership and understanding of intellectual property and dispose of non-relevant assets such as property.
Beazley adds: “You need to show the business in its naked form, but also fill in the gaps of your offering. If a seller wants to leave with say £3m but the accounts show that is an unlikely outcome then we will help them grow their business to a level where it is more likely that they achieve their objective before they start the sale process.”
How much do you want?
Talks with Bailey’s chosen buyer began in March 2010 and the sale was completed in December of that year. “You need to be crystal clear on your internal structures, ensure the accounts are well maintained and demonstrate the long-term value of the firm,” he explains. “When it comes to valuation, pick the line which is most important to your buyer. We went on a multiple of net margin and looked at previous acquisitions of similar firms over a three-year period to give us a gauge.”
He also urges entrepreneurs not to feel too sensitive around money. “It’s the elephant in the room to say that you want to be a millionaire,” he states. “It feels like it’s the wrong attitude to have towards your business, but it is a reality of being an entrepreneur. Be honest about how much money you want.”
Exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.