This year, a team of us moulded our businesses together and added a cash investment to stimulate growth. We are now entering an exciting phase for Loewy Group. From nine teams, each staffed by a maximum of 25, we now consist of 100 people under one roof. The transformation has taken three years, from first conversations to signed paperwork.
We read the textbooks and listened to a lot of lawyers and accountants. We’ve met a crop of business brokers and seen 40 other businesses during the process. And we’ve picked up a few battle scars.
The brokers tell you to formulate a strategy, which is probably true. They are good people to speak to because, like estate agents, they are realistic about what price you might achieve for your asset.
More important is to have a lot of free time and a solid business that can survive while you are on the look-out.
There’s no substitute for kissing a lot of frogs, in search of one that might turn into a princess. But travel with scepticism – there is no hurry to marry the one you are courting. Indeed, the longer you step out with your supposed princess, the better hope for the marriage – see if they have the same staying power as you, particularly through tricky moments when honesty is the best policy.
For us, a key factor in linking up is that nobody is actually leaving the consultancy concerned. Any bodges will come to light with us all sitting around the same desk. So, it’s not about getting out – any cock-ups will mean people lose considerable face and some shares. We’ve merged to create critical mass, to have challenges ‘in the trenches’ and to share relationships where we can learn to collaborate on ‘new things’. It’s often a fear of the unknown, but in reality, big greed and frauds don’t come into it. A competent team of lawyers and accountants should be able to expose any mistakes made by designers. Proceeds from the sale of most design businesses are not going to give the founders such a whack of cash that they might scarper to some distant land. At between four and six times post-tax profits, the price paid for an average design consultancy sadly isn’t even going to pay off a family man’s mortgage.
So, what are the motives for considering a merger? Sharing the load is one factor. Most groups prosper on three or four key client relationships, led by a couple of catalysts in the consultancy. It’s quite a heavy responsibility, particularly as this role also usually involves doing the book-keeping, motivating, bottle-washing and general gubbins: the troops expect their pay every month, without seeing money go on new Macs, tax bills or rent cheques.
Don’t forget tax – if you make money, the state wants its slice. In the current regime, there is no point in paying a bonus or a salary if you own the shares. This will cost 40 per cent in tax. Whereas, if you can sell shares in your group, you only pay 10 per cent tax. Consider the succession of your business, you don’t want to reach a point where you have to shut up shop with no value left… this is like renting a house and giving the keys back at the end, rather than paying a mortgage… you might be paying it off for 30 years, but in the end you have something to show for it.
There are a couple of other things to look out for too. Use your instincts. I could give you a long list, but kiss a few frogs and your gut instincts will become finely tuned. Research and more research is the key, but also follow your hunches.
And remember that if the business is worth the price of a small flat or house, people buy and sell these from two visits, an offer and a survey. Look at the big picture and ‘what happens after the big day’, rather than niggling over every bone of every skeleton in every cupboard (you are bound to have as many as ‘the other side’).
Go into the process with respect for other people’s motives, but remember to stand your ground.