Thu 23rd April 2020
Interview with an entrepreneur who has achieved just this – by Hornblower Business Sales & Acquisitions Consultant, Sian Murray
We, at Hornblower, first met Sue Nelson at a networking event in October 2016 when she suggested that the business was about a year away from selling. When I asked her for her three years of trading accounts plus management accounts for us to provide an Indicative Valuation, she told me that they hadn’t been trading for 3 years yet.
That’s right, the business was two full years old and really in its infancy and Sue was already thinking about what needed to be put in place in order to sell. Sue had a clear plan in place to ‘tee’ everything up ready for an exit. 2015 turnover was £580k but Sue had in mind a sales valuation of over £1m to make it worth her while. In 2015, a top end valuation of circa £70k meant we were a long way from that mark.
Sue is quite remarkable in terms of being single-minded. She is also the most networked individual I know – you cannot walk down the street with her in the City without her stopping several times to catch up with someone.
She has a relentless energy and a low boredom threshold, so you have to keep up with her or be left behind but she put this energy and focus into BTF. She saw a gap in the market and jumped straight on it – leaving behind an organisation that had its brakes on over this opportunity – and turned this opportunity into a fantastic, enviable business.
Sue broke the mould in many ways. The business of claiming tax relief on R&D spending sounds like a minefield to most business owners when they are busy running the day to day. Sue offered them a ‘no win no fee’ way to do this. The problem was that the offer just sounded too good to be true and building credibility in a market so damaged by ‘ambulance chasers’ was hard.
To do this without a network of expensive sales and business development people, Sue re-wrote the marketing rule book and turned herself into both print and radio journalist and created Breakthrough magazine and Food Talk radio. She used these as vehicles to get to meet and interview target clients, provide them with positive media coverage and, at the same time, prevail herself of the opportunity to have a very quick discussion about R&D tax relief; turning each and every interviewee into a client. And every single one, delighted when their R&D report is successfully approved by HMRC and a large chunk of tax is returned to their bottom line profit and more importantly into their bank account. Very happy clients who had proved that there is after-all such a thing as a ‘free lunch’.
Sue’s business model was also lean – she didn’t employ tax experts or R&D experts but just extremely good report writers and based herself on an inexpensive business park in Ashford.
By doing so she kept her profit margin high. The expression ‘turnover is vanity and profit it sanity’ is a very appropriate truism. It amazes me how many large corporates boast their size in terms of turnover values but business success and return on your enterprise has to be measured by profit. If turnover is huge but profit is negative, you are paying your clients to let you work for them and your business set up is not delivering return on investment.
Breakthrough’s gross profit was 88% with operating profit around 40%. This is another area where Sue breaks the mould. A good, highly sellable business would have an operating profit of between 20 and 25%., which we value based on multipliers of 3 to 6 times EBITDA depending on sector and scale. Another rule of thumb assessment of value will be a multiple of turnover. We often say that achieving more than 1 times turnover for a sale value is ambitious but with the profit figures of BTF, we achieved a sales value far in excess of this turnover measure.
So how did she move to that point?
When I met Sue in October 2016, she asked me for the key attributes to make a business sell and for a good value. I was unsure whether she was really going to turn it from £70k value to a multi-million value in the space of 1 – 3 years, but the advice remains the same:
- Make sure the business is sustainable. Make sure the business can run without you
- Develop your management team, identify a key person as a potential general manager or MD replacement.
- Reduce customer concentration – make sure you are not over reliant on a small number of clients – keep your client base broad and try to build stable on-going, contracted relationships
- Put systems and processes in place so that someone new can quickly understand how the business functions day to day. You want to walk away quickly and the handover needs to be achievable in a matter of months. 2 bosses for too long is never good for any business.
- Get ready for Due Diligence and you can never start too early. The sales process is long but can be contracted if the data room is fully populated and planned for well in advance. From every employee contract and job description, HR policy, business process and procedure map, VAT return and articles of incorporation, makes sure they are available and ready online – not in the back of a filing system under the 2012 Christmas cards. A failure to prepare is still preparing to fail. Not having all of these documents, can cause major and frustrating delay in getting the deal over the line and can even lead to reducing the value as points that a buyer has relied on when making an offer cannot be verified in DD.
So this is how Sue turned a business that in October 2016 I would have valued at £70k into one that achieved a multi-million pound sale to a major blue-chip multinational, Ernst & Young, that we would barely have hoped to engage with at the start of the process.
Sue made sure that she did not own client relationships and ensured from the start that she had a capable MD who fronts the business and would transfer with it for the sake of continuity.
She kept her client base broad and her profitability high.
She had a management reporting system in place which meant she had every possible business metric at her fingertips at every moment. Every other business process was documented fully including the process of training the non-specialist staff that helped secure her profitability through her unique business model.
Her dataroom was organised and meticulous; the buyer and their extended team had everything available to them and they closed their DD in record time because everything was on hand.
As with everything in life, nothing is painless or easy but this level of preparation certainly enabled Sue to achieve optimum deal value when the deal completed on 1st April 2020. Sue has been retained as a consultant to the new business, EY Incentives, and the Managing Director, who Sue had recruited and trained, remains at the helm of this new organisation and has become an Associate Partner at EY. The Breakthrough Funding team remain in place and are looking forward to a future that offers them all very solid and bright career opportunities and prospects.