EN for Business - Which way to happy?

Which way to happy?

Wednesday, 14 March 2007

James Graham looks at the most common pitfalls for entrepreneurial vendors.

It sounds like a nightmare scenario: you decide to sell your business then realise it was all a grave mistake. You start kicking your heels and then yourself before resolving to buy it back. The new owner agrees, but it will come at a cost – £500,000 above your initial selling price.

This tortuous deal is apparently being negotiated now, but the businessman in question quite understandably does not want to be identified. “He thought he’d had enough but he never really considered what he would do with his time,” says Mark Hovell, who has worked on the deal for George Davies Solicitors in Manchester.

“But he soon realised he lived for his work and once that had gone he couldn’t cope.” It’s a cautionary tale for any entrepreneur toiling away with dreams of that lucrative exit. While a great deal of effort is put into building a business and conducting a sale it appears that little is planned for post-deal life, almost as if it’s seen as a soft focus world of milk and honey where all will be well.

But Hovell talks about some entrepreneurs annoying their partners so much by hanging around at home that many end up getting divorced. “I’ve seen that happen about half a dozen times,” he says. Others can experience a crisis of confidence, a loss of direction and even have mixed feelings about becoming seriously rich .These are not characteristics often associated with successful business people. Kevin Shone, senior client partner at Coutts bank, says he has been surprised by the lack of financial savvy shown by some of his clients.

“A lot of the time it can be akin to dealing with a lottery winner. There’s a degree of acceptance they will be financially sophisticated but the vast majority have been so involved in the business they’ve not really looked at personal finance,” he says. There is clearly plenty to consider, particularly when it comes to mitigating tax liabilities. However, it’s common for these new millionaires to underestimate the time it takes to successfully manage a fortune, says Shone.

“A classic reaction is to think, ‘I don’t want to take any more risks’, so they dump it in to cash.” He does a few sums to show how easy it could e to underestimate required returns. You might want income of two per cent but after factoring in three per cent for inflation, 0.5 per cent for fees and allowing for tax, the required return could be as high as nine per cent. And that’s allowing for normal inflation. Forbes magazine compiled a Cost of Living Extremely Well Index, which showed inflation for many luxury goods and private services such as health and education is as high as ten per cent.

Paul Naden embraced the good life after making around £25 million from the sale of his Macclesfield-based loans and mortgages company HFS Group to Capital One. The deal, which valued the business at £65 million, came just nine months after he led a £33.5 million LDC-backed management buyout. In August he launched Carbon Black – a luxury European car rally – with the aim of building a strong new brand that could be used on other merchandise.

The event, which has attracted a coterie of the super-rich, has introduced Naden to some interesting potential business partners. He now owns a stake in a Serbian steel factory and his portfolio includes properties in the UK and Eastern Europe, a golf course in South Africa and a lingerie business. So far he has invested around £1.5 million in Carbon Black.

“The biggest business is the opportunity that has come from it,” says Naden, who admits this new direction was not previously mapped out. When he signed the deal with Capital One in November 2004 he was expected to stay on for two years but left nine months early after struggling to adjust to life as part of a multinational corporation. “I found it very difficult to adapt”, says Naden, who negotiated his way out but still has cash in the company.

It’s easy to understand why JohnCaudwell made it clear that he wasn’t interested in a deal which would involve shares, earn-outs or anything else that would require him to hang around when he put the Stoke-on-Trent mobile operator Caudwell Group on the market. The deal eventually went through in August valuing the group at £1.46 billion and giving 85 per cent shareholder Caudwell a £1.24 billion payoff.

Caudwell had stated he was keen to spend more time on his children’s foundation, the Caudwell Charity, and sail around the world. He is clearly not at a loose end. When EN called to discover how things were panning out we were told, “He’s climbing Everest and all sorts of things.”

It was only when Naden had left HFS that he started to think about what he wanted to do with his money and his life. “I knew I wanted to do something in a completely unconnected business, one that I could transfer my skills to,” he explains. “I felt I could do a lot more again. I had a clear idea of what I wanted to achieve, what I didn’t know was what business I should go into to achieve that.”

It took three months to come up with the Carbon Black concept and during that time Naden says he was approached by “101 wealth management companies”.

“A lot of them just talked about bonds and things that don’t turn me on. My type of business is real business that I can get my hands on.” Naden shunned the unsolicited approaches and works solely with Adam Waller at Deloitte’s private client services office in Manchester who advises him on the strength of potential investments. Many advisors recommend Naden’s attitude: do nothing for a while and definitely don’t rush into anything.

Dominic Ryder at Zeus Partners in Manchester, the retail fundraising arm of Zeus Private Equity, advises high net worth individuals, but even he admits that advisors can be a problem. “People get sick and tired of wealth managers and banks trying to get a piece of the action. The best plan is to go away and do nothing for a few months and then resurface because then you’ll have a clearer idea of what you want to achieve,” he says. “The first mistake people make is to get the wrong advisor and that can lead to a whole raft of different problems.”

Gary Sawbridge sold his pharmacy business Chemicare Health to the Runcorn-based chain Rowlands last March. The deal value was disclosed but Sawbridge and his three partners Pete Burrows, Martin Molyneaux and David Turner are thought to have shared around £20 million. They had previously owned independent pharmacies of their own, but sensed the prevailing wind in the industry (with bigger chains snapping up independents) and banded together in 1999 to create the Knights Pharmacy brand based in St Helens.

“I didn’t have a game plan,” admits Sawbridge who was a bit preoccupied when we spoke because he had just got the builders in. “As soon as we’d finished selling the business I was looking for somewhere else to live. I didn’t really have any time to think, ‘isn’t this nice’, I was just looking for a house to rent or buy.” Sawbridge has met with a few wealth managers but has avoided tying up his cash. He plans to buy a few more properties but ultimately he wants to get back into the pharmacy business with his former partners.

But like other entrepreneurs in his shoes, he doesn’t want the return to the coalface to be quite as exhausting. “I’ve always worked and I don’t dislike working, but I don’t really want to work in the same way. Hopefully we’ll do it again but with a bit less stress.”