Thoughts on introducing a partner/investor into the business

[warp9]

Hi All
I 100% own a business that was set up by my father nearly 60 years ago. It's had it's ups and downs, but are now doing pretty well given the current economic climate, which has been driven by a focused business plan, investment in our systems, changing and actively managing our culture, plus considerable ongoing support, coaching and development of all employees. We have grown around 15% yoy the last 2 years and expect this to continue.

I enjoy what I do, and while I'm not looking to sell at the moment, I do have an eye to getting out in the next 5 years. I wasn't planning nor looking to take on an investor at this point. I'm currently 52.

However, I've recently been approached by a business that's around twice the size of us that trades in a completely different sector, but part of the wider industry. Their business model means they have access to a large number of clients who are pretty much exactly our customer profile, but their income earn't per client is low and it's a one hit opportunity. In our business model, we find it hard to generate a new customer inquiry, but the income opportunity is high and it's repeat business.

They want to buy into and ultimately own a majority share of my business as they recognise that there is a big opportunity to monetise their customer base, with the plan to grow hard and fast, then exit in 5 years.

Part of me is really excited about this as it should mean significant growth and earning opportunity, but the other part of me isn't thrilled about bringing in an investor who I am then accountable to and will do all the hard work to generate the revenue.

Has anyone done anything similar or have experience in this?

[StevieBee]

Have gone through this twice.

It sounds to me that they will be the dominant party post-deal.

That being the case and regardless of the terms, the biggest issue you'll face is psychological. You're the Captain of a ship launched by your father so don't underestimate how much this can play on your mind, even it doesn't at the moment.

You need to keep in mind is that no matter how it's pitched, how it's written and regardless of what's agreed, you will become subservient to the investing party. The freedoms you have as an independent business owner will diminish alongside all manner of added obligations that do not currently exist.

You mention that you have directed focus and investment on the culture of your business. Going forward, that culture will gradually be replaced by the culture of the investor company.

These are not necessarily bad things to happen, though. In many ways, it's right that they do. But, it is necessary to accept them and make peace with these facts because fighting against them will not be in your best interest should the deal go ahead.

Good luck.

[akirk]

you need to consider that any deal done at the point of their starting involvement is good enough for you as an exit...
if they are a dominate partner once they have their feet under the table, then don't expect to be looked after from then on - they will steer everything including exit to their benefit.
I would be looking at options such as 100% purchase / partial purchase, but with future options pre-agreed / etc.

[warp9]

StevieBee said:

Have gone through this twice.

It sounds to me that they will be the dominant party post-deal.

That being the case and regardless of the terms, the biggest issue you'll face is psychological. You're the Captain of a ship launched by your father so don't underestimate how much this can play on your mind, even it doesn't at the moment.

You need to keep in mind is that no matter how it's pitched, how it's written and regardless of what's agreed, you will become subservient to the investing party. The freedoms you have as an independent business owner will diminish alongside all manner of added obligations that do not currently exist.

You mention that you have directed focus and investment on the culture of your business. Going forward, that culture will gradually be replaced by the culture of the investor company.

These are not necessarily bad things to happen, though. In many ways, it's right that they do. But, it is necessary to accept them and make peace with these facts because fighting against them will not be in your best interest should the deal go ahead.

Good luck.

Thank you for your reply. How do you now feel about having gone through this process? Good, bad, regrets? Is there anything you would have done differently?

[jeremyc]

Is there an option to partner with them for a period in order to determine whether the assumptions as to increased business growth are real? This might be on some kind of revenue share basis for new business they generate.

That way you get to find out a little more about what it might be like working for them, and they get to see if the combined business is likely to be the success they assume without having to go to the lengths of investing.

Think of it as a snog before marriage.

[StevieBee]

warp9 said:

StevieBee said:

Have gone through this twice.

It sounds to me that they will be the dominant party post-deal.

That being the case and regardless of the terms, the biggest issue you'll face is psychological. You're the Captain of a ship launched by your father so don't underestimate how much this can play on your mind, even it doesn't at the moment.

You need to keep in mind is that no matter how it's pitched, how it's written and regardless of what's agreed, you will become subservient to the investing party. The freedoms you have as an independent business owner will diminish alongside all manner of added obligations that do not currently exist.

You mention that you have directed focus and investment on the culture of your business. Going forward, that culture will gradually be replaced by the culture of the investor company.

These are not necessarily bad things to happen, though. In many ways, it's right that they do. But, it is necessary to accept them and make peace with these facts because fighting against them will not be in your best interest should the deal go ahead.

Good luck.

Thank you for your reply. How do you now feel about having gone through this process? Good, bad, regrets? Is there anything you would have done differently?

Ok... are you sitting comfortably?

The first time, I was a little naive.

Early 00s. I was in my mid 30s and had a quarter share in a Design Firm in London that was acquired by a much bigger and very 'cool' branding company. We were looking to either acquire or be acquired and were won over by their pitch. Central to this was that they wanted to retain our culture, keep us in the same office (Clerkenwell) and essentially just rename the company. They wanted a smaller design house to feed in work that they had been turning down as it didn't quite fit what they were doing. My 24% would be reduced to 10% but I could see that in 'money', the longer term would be much more fruitful.

Within six months of the deal being done, we were relocated to their Chelsea Harbour office (a major pain for me living in Essex) and my role had morphed into that of a Salesman. Shortly after that I left.

My first regret with this one was that there was no reason for us to sell. The company was profitable, nice wedge of cash in the bank. We did really good work and had a great team there. A client once said we were a 'lovely' company and we were. Clients would find and excuse to come and visit us because they liked us. We just had a meeting one evening and the feeling was that we'd stagnated and need to inject something different to move the company forward.

The deal was pitched to us in a way that tickled the fancy of three of the four Directors. We weren't sufficiently cynical to question the reality or even spot what they really wanted (a very cheap long term lease on a a cracking city office, a team of brilliant designers and five blue-chip clients). The exception was our FD. He was the oldest of the lot of us - the BiL of the founder. He'd technically retired but his wife left him so ended up bored and alone so returned to work. He was an excellent FD but a typical one in that he always looked a the negatives over the positives. He knew exactly what was going on and predicted with remarkable accuracy what would happen. He'd been there many times himself but we considered him outdated, out of touch and uninvested in the future. So, my second regret is not listening to someone who really knew the score.

And the third regret was not paying attention to the contract. We could have easily protected our position with a more robust approach to the contract but creative types are not known for their attention span to anything that doesn't involve creativity!

The second one was entirely different.

Around six years after I left the previous firm, I was working for a small Ad Agency and had began to develop a very unique niche in the field of behaviour change communications supporting local authorities rolling out what was then brand new kerbside recycling services. Within three years of our first campaign, we'd won five similarly sized projects and had launched a division and brand with a view to at some point creating a dedicated business serving the market.

Out of the blue, we were approached by a company that manufactured wheelie bins. A French owned multi-national operation that also made many other plastic things... such as the front assemblies of Minis. IIRC, their turnover then was around €2billion. Ours was £600k.

They reasoned that a wheelie bin was coming in at around £11 each. Most councils were buying 2 per household. We were developing campaigns to encourage their use and motivate their use that were costing around £3 to £4 per household. By absorbing the campaign cost within the cost of the bins (cost of production was around a £1 a bin!!) they could offer significant added value compared to their competitors who were just flogging bins. We had market share, brand recognition and IP on a proven approach. Because of this, they wanted to buy us - even though, there wasn't technically anything to sell. But they said if we set up a standalone business, they'd buy it.

The first thing I did was to put myself first. I had a 10% share of the ad agency. My business partner had invested a lot of his own money in building up the division I was now running. I had invested no money but it was my expertise and drive that was building it. So I negotiated with him a 30% share of the business that we'd set up for them to buy. This gave me much more skin in the game and meant I was more invested in the procees.

Next was to learn from the previous experience.

As before, we didn't need to sell so I used this as an ace up the sleeve. We were sat at their HQ in Paris, thrashing out the amount they'd pay. I'd left this to my business partner who was quite the negotiator but on this occasion, it seemed to be going nowhere. This was because we were selling a company that we'd set up a month earlier that had zero turnover and zero profits so the figures were entirely arbitrary. (I'm still quite impressed with myself on this next bit.....). As my partner was attempting to explain future projection, I leant forward, slapped the table and said "Here's the thing. We don't need to sell to you. We're not certain that we want to sell to you. So the onus is on you to offer us a price that will shift that paradigm". The chairman scribbled a figure on a post-in note and handed it to us. We nodded, shook hands and left, walked to the station and got on the Eurostar.

You know that bit in Only Fools in Horses in the van when they come out of Sotheby's having sold the watch? That was exactly the same as us on Eurostar.

Again, drawing from experience of the first example, contract negotiations were very robust. Their UK operations were based in Telford and we secured a legal commitment to remain in Essex. We retained sufficient shareholding to keep us invested in the business and other things.

On the cultural shift, I'd made peace with the fact that I was to become part of a large corporate machine. I spent time in that machine, working on a few projects, meeting others and learning the operations and obligations before I committed to sign anything. It wasn't my thing but I reasoned I could live with it - more something to just get used to.

So all was good.

But they pulled out literally at the 11th hour ..... decided to focus on the automotive side of the business.

So - a bit of a ramble but I think the context is useful.

I regret not being more cynical and enquiring.
I regret not listening to people who had more experience on these sorts of things.
I regret not protecting myself more robustly.

As for things I'd do differently....

I'd be much more self critical on why we need to sell
I'd certainly sink myself into the culture of the acquiring company before committing

I would say that although there's things I did wrong and regret doing or not doing, looking back, I don't regret what happened. I'm in a place today that I really like that I'm not certain would have been the case had either of these scenario panned out.


ETA..... Was mulling this over this morning and considered the relevance to your situation and there's something that I think is highly relevant.

With the Design Firm, we never had a plan for the business other than consistent growth. It just existed. We came, did good work, won new business, rinse and repeat. So when the offer landed, we had no framework of progression, no strategy, no objective that we could measure against in terms of how the deal would support those aims. As such, post deal, the analogy I'd use is that we felt more like deck-hands on a new ship rather than masters of our own ship but now in a fleet.

With the Ad Agency, we did have a strategy; a clear pathway forward and could see where the business could go, and how we might get there. This meant that when the deal landed for that, we could assess how that deal would influence and support our strategy. Although that one never happened, the fact that they had expressed interest and got as far as they did gave us incredible confidence that we were on the right trajectory.

So the lesson learned here is to have a clear plan for your business and make a decision based upon how any deal will affect that plan.

Edited by StevieBee on Thursday 28th November 08:07