smallbusiness.co.uk: Helping your business think big

Executing a slick full exit takes preparation, thick skin and bags of raw cunning. SmallBusiness.co.uk finds out how to avoid the pitfalls and get the best price.

Martin Stiksel is still on a high. He’s just sold Last.fm, the business he co-founded in 2002, for £142 million.

‘With the future of the company secured, we have a lot of security to do all the things we only dreamed about,’ says Stiksel, who at the age of 32 is the oldest of the three founders.

For Stiksel, Felix Miller and Richard Jones, the sale of Last.fm to US broadcaster CBS last month marks the culmination of five years’ hard work.

‘In the early days, we couldn’t pay our rent, so we had to sleep on the roof terrace,’ Stiksel recalls. ‘At one point we paid people by cooking them lunch.’

CBS evidently liked what Stiksel and his colleagues had created, a website that allows users to listen to music online, and recommends new songs and artists to them based on their tastes. There is also a social networking element to the site, as it brings together people with similar preferences.

Both buyer and seller moved quickly. From CBS’ initial approach to completion, the nine-figure deal took a mere two weeks. ’We were looking for the right partner to secure our future and independence, and crucially one which shared our vision. CBS really clicked with the team – we had a very good understanding,’ Stiksel reveals.

All in the planning
Hugo Haddon-Grant is managing director of Cavendish Corporate Finance, which advises vendors. He says many owner-managers could benefit from better organisation and forethought.

‘Often an owner comes to us and says: “I’d like to sell this business yesterday.” That is often a mistake. If you plan a sale a year in advance, there’s a lot you can do to polish up and position a business in order to add value and make it easier to sell too,’ says Haddon-Grant.

Intrinsic value
A make or break element of preparation is ensuring that the business has core value without your involvement. Having a strategy not only improves exit prospects, it also allows would-be vendors to exploit opportunities in the market.

‘Certain sectors become the flavour of the month for a period, then go out of fashion,’ argues Haddon-Grant. ‘Quite often, a client will see one or two competitors being sold and achieving good prices. Or there might be press coverage about consolidation in a particular sector.’ Such opportune moments tend to be short-lived.

Growing in harmony
As well as keeping an eye on the market, sellers should try to find a buyer at the right point on the company’s own growth curve. If there’s a lot of potential in the business, that can be a powerful weapon in your bargaining armoury.

Although Last.fm’s owners spent two years rejecting dozens of offers for their business, Stiksel admits that the company’s future growth could not have been secured without the resources of CBS. ‘If you get bigger, you need stronger partners,’ he notes.

Check yourself
Once you’ve decided it’s the right time to sell, the next question will be how much you can expect in return for your business. For Haddon-Grant, you may need to begin by adjusting your expectations.

‘Clients’ ideas of their business’ value tend towards optimism, which is not surprising,’ he says. ‘It’s easy to look at a similar business on the stock exchange and say: “That business has that earnings multiple; therefore my business should be valued on the same multiple.” The danger is that profits may be calculated after the directors have taken substantial drawings, which will make the multiple higher.’