The View From the Buy Side, Lessons From Our First Year
Nearly twelve months ago we launched Oakmere Partners with a simple objective, to acquire good quality owner-managed businesses. We expected the market to be competitive, occasionally frustrating and, like most markets, a little inefficient. What we did not expect, having now reviewed 38 businesses in detail, was just how many good businesses reach the point of sale without ever having been built to change hands.
That observation has very little to do with whether the economy is strong or weak, whether there are enough buyers in the market or whether interest rates are higher than any of us would like. Nor is it simply a broking issue, although there are aspects of the broking model that deserve scrutiny.
If this period has taught us anything, it is that most of the challenges we have encountered were created years before a business ever appeared on a broker's website.
The numbers tell an interesting story. We reviewed 38 businesses, have five transactions still progressing, have made three offers which were rejected and have one offer currently on the table. Those opportunities came from introductions from our networks, 11 different brokers and from the around ten seminars we have delivered on exit and succession over the past year.
Interestingly, some of the most valuable conversations have not started with an information memorandum or a confidential sales pack, they have started after one of those talks, when a business owner has quietly admitted that they have spent years asking themselves whether they wanted to sell, but had never really considered whether somebody else would actually want to buy.
What surprised us most
The statistic that stayed with us was not how many businesses we reviewed, but how long many had already been available.
Of the 38 businesses, 30 had been on the market for more than a year. Many had been available for well over three years and, in most cases, remarkably little had changed. The valuation remained broadly the same, the positioning remained constant and the sales particulars looked much as they had when they first appeared, perhaps with the odd adjusted set of financials. Enquiries had come and gone, time had passed and yet very little had been done to improve the chances of a successful sale.
We found ourselves asking the same question repeatedly. If a business has been on the market for three years, what exactly has changed during those three years to make it more attractive to the next buyer than it was to the previous one? In too many cases, the obvious answer appeared to be very little.
Our experience appears consistent with wider evidence. Research from the Exit Planning Institute suggests that only 20 to 30 per cent of businesses taken to market ultimately complete a transaction and some industry estimates suggest broker completion rates may be closer to one in ten.
It would be easy to conclude that the broking system is broken and there are certainly questions worth asking, as a market that rewards winning instructions more readily than completing transactions inevitably creates incentives that are not always aligned with the client's long-term interests.
Equally, however, that explanation feels incomplete. Brokers can only sell the business they are given, if the underlying business has never been prepared for life beyond its founder, no amount of marketing or negotiation can fundamentally change that.
Further, given the fees on offer, brokers are, for the most part, not engaged to advise businesses on restructuring or properly preparing themselves for sale. They are selling what arrives on their desk, not rebuilding it.
The market is exposing a deeper problem
As we reviewed more businesses, a second pattern became increasingly difficult to ignore. Most businesses remained heavily dependent on their founders with little thought given to what that might mean during an exit process.
Customer relationships sat in the founder's phone, commercial knowledge sat in the founder's head. Important operational decisions relied on one individual and many of the processes that kept the business running had never been documented because, until that point, they had never needed to be.
None of this is unusual as most entrepreneurial businesses begin this way, but the difficulty comes when the owner decides it is time to leave.
From a buyer's perspective, founder dependency represents risk. It does not necessarily prevent a transaction, but it almost always changes the discussion. Buyers reduce their valuation, seek earn-out arrangements and require the founder to remain involved for a significant period after completion. Sometimes they simply move on to a business that appears more transferable because, as our experience suggests, there is usually no shortage of alternatives.
Alongside founder dependency sat another recurring issue, namely pricing. A surprising number of businesses came to market at valuations they were never realistically going to achieve. Whether this is driven by optimism, emotion or poor advice is almost secondary. Once that opening valuation has been established it shapes every conversation that follows as serious buyers often decide not to engage, while every subsequent reduction weakens the owner's position and creates fresh uncertainty in the process.
Looking back over the businesses we reviewed, we increasingly came to the conclusion that the most expensive mistake in many sales processes had been made before the first buyer had even picked up the telephone.
Exit starts much earlier than most owners think
The more businesses we reviewed, the clearer the underlying issue became. Very few owners appeared to have built their business with succession or exit consciously in mind.
Research linked to the Federation of Small Businesses suggests that only around 35 per cent of UK small firms have a formal exit or succession strategy. Based on what we have seen during our first year, that feels entirely plausible and perhaps slightly optimistic. For many owners, succession remains something they will deal with in the future until eventually the future arrives rather sooner than expected.
Unfortunately, preparing a business for sale is rarely something that can be achieved in a few months. Building a management team, documenting systems, broadening customer relationships, improving management information and reducing founder dependency all take time. By the point many owners decide they would like to sell, buyers are already asking questions that cannot easily be answered.
None of this should be read as criticism of business owners. Quite the opposite. Almost every business we reviewed had been built through years of determination, personal sacrifice and entrepreneurial commitment. Many were fundamentally good businesses, our frustration was that relatively modest changes, made several years earlier, would almost certainly have resulted in a stronger business and a much more attractive acquisition opportunity.
Looking ahead
The (almost) first year has reinforced something we believed when we launched Oakmere Partners. Value is created long before a broker is appointed and long before an information memorandum is written. Businesses rarely fail to sell because there are no buyers, more often they struggle because nobody spent the time beforehand building an organisation that could thrive without the person who founded it.
The encouraging part is that this is not an irreversible problem, almost every business we reviewed had something worth preserving. Loyal customers, committed teams, strong reputations and years of entrepreneurial effort had created businesses with genuine value. What was often missing was not quality, but preparation, that is precisely why Oakmere exists.
We are not looking for perfect businesses, we are looking for good businesses led by founders who recognise that building a successful business and preparing one for succession are not the same thing. We understand the position many founders find themselves in because we see it every day, more importantly, we believe it can be addressed.
Where we see the right opportunity, we want to work with founders who are prepared to be honest about where they are today and committed to where they want the business to be tomorrow. That means reducing founder dependency, strengthening management, embedding systems and gradually transferring knowledge, relationships and decision making into the business itself thereby enabling us and them to realise real value on all sides.
In many respects, the conditions we have encountered since we launched have reinforced why we established Oakmere in the first place. There is no shortage of good businesses in the UK, there is, however, a shortage of businesses that have been consciously prepared for succession and founders who recognise that reality and are prepared to address it whilst creating the exit they desire.
If this period has taught us anything, it is that the best acquisitions are rarely just transactions, they are partnerships built around creating a shared objective, a businesses that can outlive the founders who built them.