Duane Jackson became an entrepreneur by accident. As a self-employed website developer, he struggled to find user-friendly accounting packages to do his books and file tax returns. In true start-up fashion, he developed his own innovative accounting software and five years later, in 2010, he found himself running KashFlow.
Despite steady growth and a customer base of 20,000, Duane no longer enjoyed managing the business and began seeking an exit, retaining the services of a mergers and acquisitions (M&A) agency to identify buyers.
Duane’s agency secured interest from several players, but nothing took. However Duane did attract the attention of serial entrepreneur Subrah Iyar, co-founder of web-conferencing business WebEx. Subrah had approached the company initially as a potential investor, but struck up a friendship with Duane and ended up helping him identify where he was going wrong. “I realised I hadn’t built up a team and was doing too many jobs myself,” says Duane, who went on to recruit a new management team that helped rekindle his passion for the business. The addition of a strong management group also had a beneficial side effect: it made Duane’s company a lot more attractive to other companies as a potential acquisition.
Keeping your distance
Some time later, accounting software giant IRIS approached KashFlow with the first of two offers, both of which Duane confidently rejected. “On both of those occasions, I was genuinely unwilling to walk away from the business,” he says. IRIS made a third offer, which valued KashFlow more attractively, and Duane took their proposal to the KashFlow board.
There followed a period of negotiation and due diligence as Duane decided to distance himself from negotiations and asked a fellow director to take meetings with IRIS. “I was very emotionally involved in the business,” he says. “Having another person handle the negotiations was helpful because he acted as a filter and reacted more positively to requests than I would have done.”
Duane successfully sold KashFlow to IRIS in 2013 and his experience of making a trade exit has taught him key lessons in several areas:
Identifying potential acquirers
Duane knew that other potential acquirers would not pay the same premium as IRIS and so was unwilling to instigate an auction in an attempt to increase an already agreeable offer. “The textbooks tell you to look for other buyers to drive up the price,” he says. “But we understood IRIS and we understood the premium they were willing to pay.”
Duane believes it’s important to understand what your would-be acquirer wants from your business, whether it’s the product, the brand or the customers. “If you understand that, it makes the rest of the process a lot easier,” he says. “It also gives you a better idea of the points you can negotiate on and what’s likely to be non-negotiable.” If potential issues arise, make sure your buyer knows what those issues are. Duane believes honesty is paramount. KashFlow’s growth had slowed in a way that may not have been immediately obvious to IRIS. “We made sure our buyer was aware of that,” he says.
An offer in writing
This is the turning point. “Getting it in writing shows that the board of the company is truly committed, not just the people you're talking to,” says Duane.
Due diligence can be daunting. Duane’s advice is to be methodical and realistic. “When you're the seller you feel like you have to give them everything they ask for, but you don’t,” he says. “It's fine to say ‘no’ to a request because it'll take too long to prepare the data. Often they'll ask baffling questions. Again, it's fine to go back to them and ask what they're trying to achieve with that question. Sometimes it's just their accountants or lawyers being overzealous.”
When it comes to exit terms, Duane believes it’s best to disregard any additional sums the company will pay for future performance or for keeping you in the business. Assume it’ll never happen and instead ask yourself whether the upfront amount on its own is still attractive. “In my case, a complete exit with no strings was what worked best,” he says. “Taking an entrepreneur into a bigger company often doesn’t work out.”
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