Sponsored Content
How should you go about selling your own business? Emily Moore finds out from Luke Smith of Rialto Investment Partners
WHEN you launch your own business, it is only natural to dedicate every waking hour and ounce of energy into getting it off the ground.
It is just as natural, as the sleepless nights, low salary and non-existent social life begin to pay dividends, to focus on growing that fledgling enterprise, increasing its turnover, recruiting more staff and identifying new markets.
But while some business owners may have a clear exit strategy in mind from day one, the vast majority of them start approaching retirement, or the stage at which they would like to step away from their company, without a clear succession plan or way out in place.
And it is with this in mind that Rialto Investment Partners director Luke Smith says that it is vital not to ‘assume you are going to retire but not sell your business.’
‘Although it might sound paradoxical, when you are preparing to sell a business, you really want to make yourself redundant,’ he said. ‘If you are fundamental to a company’s viability, then you won’t be allowed to leave before you have made the money back for whoever buys the business.’
Having founded the boutique private-equity firm with Oliver Mourant in 2020, the initial idea for Rialto stemmed from Luke’s accountancy experience.
‘I was working with a number of clients who owned successful profit-making businesses but who I knew would struggle to sell when the time came because they didn’t have any succession planning in place and the firms were too big for a management team buyout but too small for traditional private-equity firms to be interested,’ he said. ‘However, as I knew the accounts and the teams, I knew that if I could ever raise the money to get my own private-equity firm off the ground, there would be an opportunity to buy the companies at a price that worked for everyone.’
But while he was convinced of the potential for Rialto, securing that initial finance was far from straightforward.
‘When Oliver and I first got together in 2020, the first question was “How are we going to do this?”,’ he recalled. ‘We must have approached about 40 people in an attempt to raise the money but no one was willing to invest the amount we needed. We were in this position of trying to secure capital when the opportunity to buy Maillard and Co arose. We found a broker who said he had secured the money but the funding didn’t materialise.
‘The broker then contacted people in his network to try to find the necessary funding and, luckily, one of the investors he approached knew the property market pretty well, saw the potential in the acquisition and agreed to back us.’
After buying out the original backer just over a year after the deal went through, Luke and Oliver then secured additional investment from a local family who ‘agreed to fund the next stage of the company’s growth’.
‘They also had lots of experience in the property market, so they realised that, although there is always an element of risk in any investment, this one wasn’t a massive risk because Maillard’s property management team looks after a huge number of local properties, servicing a market which will always be there,’ said Luke. ‘We were very lucky that our first deal was property-related and ever grateful to our initial investors, who trusted us at the start.’
Indeed, since then the firm has gone on to acquire a number of other locally based owner-managed businesses, including accountancy firm Purpose, Signtech and Shooht.
‘Signtech is a really good example of a business which worked with us to develop a strong exit strategy,’ Luke explained. ‘The owner was thinking about retiring and approached Jersey Business, who put him in touch with us. We recommended that he worked with our team at Purpose for a couple of years so that we could focus on building the numbers and putting a succession plan in place to boost the company’s valuation. Through Purpose’s Business SatNav programme, Signtech continued to develop to a point where we had enough confidence to agree a good deal for everyone.’
This approach boosted the business to a price all agreed was fair, but Luke said that aligning a firm’s mathematical valuation with its owner’s expectation was often one of the stumbling blocks when it came to closing other deals.
‘In a lot of cases, people think that the business is worth more than a buyer would be prepared to pay,’ he added. ‘In some cases, the owner is also nervous because they are depending on the sale of that business to fund their retirement.
‘While, in some cases, an owner may get a low-level management buyout, where someone who has been working for the firm pays for the shares over a four- or five-year period, that is not always realistic and does not create the most value for the owner anyway. And, with the due diligence checks often costing around £60,000, it isn’t always viable for people to fund the acquisition process.
‘Banks will rarely lend to fund small-business purchases and if someone internal cannot be found to raise the money, the main challenge is finding people prepared to buy the business.
‘A number of brokers are now setting up in Jersey but, while it’s all well and good helping people to sell, you have to have people who want to buy and that is the problem that we are trying to solve,’ he added. ‘The main reason banks won’t lend and investors do not want to acquire these businesses is that they usually have to rely on the owner to make sure they are profitable.’
Helping business owners to prepare for that sale, Luke references John Warrillow’s ‘sellability score’, put forward in his book Built To Sell.
‘John identified nine core factors which influence the value of a business,’ said Luke. ‘The most important of these comes back to succession planning because, as mentioned earlier, if the owner is fundamental to the success of the business but is planning to leave, the value of the company diminishes.
‘Unsurprisingly, good numbers and signs of an upward trajectory are also important, as is the customer base. If, for example, the business relied too heavily on one or two customers, that would have a negative impact on its valuation because if they left, the whole company would be vulnerable. And, although boring, policies and procedures are really important because you have to have a business which is run by a system, which could be managed by anyone, rather than by one key person.’
With so many elements to consider, it is not surprising that Luke says preparing for such a transition takes 18 months to two years.
‘While you may be thinking about winding down, it is actually really important to step up, do things differently, recruit the right team to drive the firm and think like an entrepreneur, looking at the ways in which your business can evolve so that it is attractive to potential buyers,’ he said.
