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Jumping ship: business owners should be prepared to exit their ventures at any time, mergers and acquisitions specialist les Nemethy says.

Many a company owner, especially those that have founded an enterprise and are deeply involved in its day-to-day operations, will treat even the suggestion of disassociating from their business with disdain. But, author and mergers and acquisition (M&A) specialist Les Nemethy argues, every business should be built with a view to an eventual exit for the owner, even if they find the thought disconcerting.

"Nobody lives forever and unless the business is built with a view to eventual exit--and that doesn't necessarily mean a sale, it can mean a management buy-out, passing it on to the children, whatever--there needs to be a strategy and a plan of how a business owner is eventually going to exit and there needs to be a constant progression toward execution of that plan," Nemethy told The Sofia Echo in a recent interview.

Nemethy's book, Business Exit Planning, means to guide business owners through this process and to remedy the "gap of knowledge of how to exit a business" that he found over two decades of advising company owners on the sale of their businesses.

"The book is aimed at owners of mid-sized businesses and owners of businesses are usually individuals with very healthy egos--otherwise they wouldn't be owning and running businesses--and so they don't readily let on when they don't know something. It became apparent to me after more than 20 years of talking to owners of businesses how big the gap is between what the owner of a business needs to know and what they generally know before going into a first transaction," Nemethy said.

"Whether that is raising capital or finding a strategic or financial partner, selling a minority or a majority [stake] in their business, I found myself spending dozens and dozens and dozens of hours repeating pretty well the same things to different business owners and that's when I realised that there's a pattern here and that this pattern should be encapsuled in a book because it is, I believe, of general validity."

Knowledge gap

Nemethy says that a solid financial education is his personal mission.

"If there were proper financial education, we would avoid recessions--or tremendously reduce their impact--and we would avoid the kind of polarisation that's happening, where the rich are getting richer and the poor are getting poorer. Financial ignorance is a huge cause of strife for a lot of families and even a lot of businesses throughout Central Europe and the world," he said.

This is a gap that even master of business administration (MBA) courses have failed to bridge.

"I would say that the entire MBA programme--which is kind of the crucible in which most business owners/managers are trained these days, or the most legitimate form of financial education--teaches you how to set up the business, how to run a business, how to operate a business, strategise through business, logistics, financial analysis, operations. But they don't teach you how to exit the business in business school."

"That's what Business Exit Planning is all about, it's basically designed to remedy that gap of knowledge of how to exit a business, with exit being broadly defined to mean full or partial exit, bringing on board strategic or financial partners as well," he said.

This is the second iteration of his earlier book, Unlocking Your Company's Value, initially published in English by a Hungarian publisher. It was later picked up by John Wiley & Sons, Inc., who asked for some changes.

"They insisted on a different title and, as every good publisher does, they also insisted on a little bit of restructuring of the book; they made the organisation a little tighter, with fewer titles and an editorial review. But about 95 per cent or even 97-plus per cent of it is the same book. It might create a bit of confusion, but for all intents and purposes, it's really the same book," Nemethy said.

It has been translated into Bulgarian, Polish, Czech and Hungarian, with Serbian, Albanian and Russian-language versions on the way, as well as contracts to translate it into Italian and Dutch.

"We're up to about 10 languages so far and my goal is to push this out to roughly 20 languages this year," Nemethy said.

Two notable regional absences are Romanian and Greek-language versions, though Nemethy says it is not for lack of trying.

"In fact, the publishing markets in both countries are so depressed right now that the publishers are generally not signing contracts to take on new books--I'm not saying never, but the number has been vastly reduced. We have tried quite hard in both of those markets, but we have not succeeded in finding publishers."

Lessons to be learnt

When I put to him that many companies in Central and Eastern European countries are disproportionately run by a single individual who are invested as much personally as they are financially in their businesses--a phenomenon that Nemethy calls "one-man shows"--he disagrees.

"I think that there are one-man shows everywhere in the world. Bulgaria or Central Europe doesn't have a monopoly on businessmen who run their businesses alone, making all the major decisions on the back of an envelope or in an excel sheet."

"There are many things that are positive about that--they certainly save on costs by not having to pay salaries to an entire level of management that would be required to substitute them--however, if one is trying to exit a business, I have seen many business owners who I call one-man shows, who are the autocratic strong leaders of their businesses, fail to sell their businesses because the purchaser or investors simply perceives it to be too much risk."

But he is keen to emphasise that selling one's company is not the only way to exit the venture.

"It is not just the exit in the financial sense, there are different types of exit. You can exit in a financial sense, i.e. sell your shares but still remain involved in the business on a personal level, you can exit in terms of personal involvement and still own your shares, i.e. appoint someone to manage the business."

"Typically, an owner/manager when he wants to sell his business, also wants to phase out, at least in one or two or three years after selling the majority of his shares, and that phase-out needs to be carefully prepared.

"There are ways for preparing that before the selling of the majority of shares, i.e. creating better systems, delegating to staff; there are ways of doing a phase-out after the sale of the majority of shares, generally referred to as an earn-out, where the owner/manager maintains 20 per cent or 30 per cent of his shares and is bought out over the following two or three years, the evaluation being a function of the performance of the company.

"These are the types of things that a business owner needs to know about and plan for; these are the types of issues that the book talks about."

One place to look for answers is the private equity industry, where investors go into every deal with an exit strategy already in place.

"With business owner/managers, this is a taboo question. Merely raising the question, they perceive, can create doubt among their employees or clients. And so the question tends to be swept under the carpet.

"In my book, I use the analogy of climbing Mount Everest--there are more people who have perished descending from Everest than on the climb. And it's partly because people put more planning into the climb and not so much into the descent, and on the descent you're already tired, not as motivated as when you're climbing, so there is a higher tendency for errors.

"It's a very apt analogy and it really underscores that the climb and the descent is part of the same process, as for a business owner building a business and exiting a business are not two separate processes, but part of the same continuum. And that is the philosophy of the private equity people, that is one of the paradigm shifts that I'm trying to bring to the universe of owner/managers."

Tight opportunities

The global financial crisis has impacted the M&A sector heavily, both in the number of transactions being closed and the time that it takes investors to exit a venture.

"There are still sectors where there is a huge amount of activity, but even for those sectors where there is less activity now, I would argue that you need to go about consciously building the value of the firm and preparing it for the exit, for the moment when the window opens so that then you can act quickly," Nemethy said.

"Part of my motivation for writing the book is that the vast majority of business owners, when they take their companies to market, the companies are not ready because of the lack of this knowledge and how to prepare a company properly. So the process ends up taking much longer than what it needs to take or should take and you have a much higher failure rate. By consciously building the value of the business, you prepare yourself for when that window opens so that then you can act quickly before the window closes."

And such windows can be pretty tight because of circumstances outside one's control, Nemethy says, speaking from his own experience.

"In 2001, I was working on the sale of a telecom company, and the tender had completed--there were quite a few offers, but the best offer was still $20 million short of the vendor's expectations. We went through several weeks of very intense negotiations whereby the $20 million got narrowed to $5 million and we began to have some hope that the last $5 million might be bridgeable and that the deal might be closed.

"But 2001, you will remember, was the year of the twin towers, the World Trade Center in New York. September 11 hit and the gap once again widened from $5 million to $20 million so, for all intents and purposes, the window closed for that sale opportunity. It wasn't until three or four years later that that company was sold.

"That's what I mean by window, these can be quite dramatic and are driven by things that can sometime be very unexpected and that's why when you're doing a transaction, you need to do it quickly [...] that's why an owner needs to prepare his business very very well so that you minimise the time when the company is on the market and you can close the deal quickly, free of any risks or natural disasters or other factors that might close the window," he said.

There is a silver lining to the recession too.

"Any business owner who has survived a down cycle has, first of all, gone through a tremendous education--you learn a lot when you go through a down cycle--and he's proven that he can be agile enough to survive a down cycle and it's a demonstration that the business is capable of surviving. The track record that an owner or a business has is certainly one of the factors that will influence the view of an investor," Nemethy said.

Looking forward

"Assuming a scenario of muddling through or slow, steady recovery--which I think is the likeliest scenario for CEE and, mind you, I think that there are time bombs that could derail growth patterns worldwide--I think that the M&A market too will continue to improve in proportion with the economy. There's a high degree of correlation there; it won't be dramatic, but I would foresee that the M&A activity will resume," Nemethy said.

Such time bombs would include a potential default in one of the euro zone's troubled markets triggering a wave of bankruptcies, people losing confidence in fiat currencies in countries with huge money supply (the US and UK are both on this list), or even unforeseen natural disasters, yet Nemethy is broadly optimistic.

"People can defy to some degree the state of financial markets by applying knowledge to obtain superior results, whether it's by improving your strategy to take advantage of the current market situation or you can actually grow the value of your company even in these poor market conditions. There is still much more capital in the world seeking outlets than there are attractive investment propositions.

"The other point that I would make is that it really boils down to a question of pricing--the real estate market in much of CEE has come to a halt, but if you reduce price, there comes a point where you find a buyer. It's the same way with a company as well, there is no such thing as a good company or a bad company--as a colleague of mine used to say, there is only a good price or a bad price--the M&A activity can be postponed, but if somebody is ill or there is a death of the owner of a business, the business has to be sold or transferred.

"You can postpone but you cannot completely stop M&A activity. I see the M&A activity gradually coming back and with the lower level of activity today; there is actually a kind of pent-up demand--many people who weren't able to exit over the past two or three years would like to exit as soon as the market gets normalised to some degree."


Les Nemethy is the founder and CEO of Euro-Phoenix Financial Advisors Ltd (www. leading corporate finance house in the field of emerging markets in Central Europe specialising in helping owners of mid-sized enterprises sell their companies. His career includes stops at Canadian law firm McMillan Binch and investment bank McLeod Young Weir (today ScotiaMc Leod) before his appointment as head of the transactions department of the Hungarian privatisation agency in 1992, where he led the privatisation of a number of companies, including via initial public offerings. He then moved on to the World Bank, where he helped governments privatise companies and attract investment, but returned to Budapest in 1997 as chief executive of MaTel (today Invitel), the country's second largest telecom. He founded Euro-Phoenix in 2000. Nemethy lectures frequently and has taught courses in universities from Georgetown University to the Central European University, mostly on the subject of negotiations. He is a former president of the American Chamber of Commerce in Budapest, and the author of a column on finance and the M&A sector in particular, which appears in The Sofia Echo and The Budapest Times. His book, Business Exit Planning, is published in English by John Wiley & Sons, Inc. and is sold on amazon. com in hardcover and Kindle format. It is published in Bulgarian by Klassika i Stil publishing house and available in Helikon bookstores.

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Author:Bivol, Alex
Publication:The Sofia Echo (Sofia, Bulgaria)
Date:Mar 2, 2012
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