How we built a business out of recession - chapter 52 - tick tock, one year and counting.
The story of CitNOW*
This is the 52nd chapter about CitNOW, the company started from a kitchen table in Winnersh, Berkshire. If you’d like to read from the beginning, here’s a link to chpt 1. Each chapter is a 5-minute read. It’s an early draft of a book.
CitNOW was founded by Andrew Howells and Donna Barradale in 2005, although the company was only registered in 2008. In February 2018, we sold the company to Tenzing, a UK private equity company. It has been sold again since.
By the time January came around, we continued to believe that Tenzing was wrapping up the formalities. Two individuals were responsible for managing the due diligence. Their team had found no material issues that might impact the sale.
I knew Nick** had been very forthright in his interview about achieving the projected 2018 European sales target. He didn’t think it was possible, and hadn’t sugar-coated his response when asked.
I’m sure this would also have been countered by Gordon*** and Alistair. Either way, Nick’s honest opinion didn’t seem to have derailed anything, and the process continued.
Tenzing finally announced that they were done and very happy to proceed with the sale. There was just one more formality which needed to be undertaken. It was something they did with every potential purchase, and the paperwork for the sale wouldn’t be started until the company passed this final test.
The team that’d been working on the sale now stood aside. Enter stage left, a group of seasoned business professionals, with no prior knowledge of CitNOW, who were given all the relevant information and asked a simple question: Would you pay £30 million for this company?
After a day’s deliberation, their answer was unequivocal. No, not as it stands.
Their reasoning was clear. They were struggling to believe that the company would comfortably exceed the £1 million recurring monthly revenue, on which the sale price was based. It was clear from the monthly returns for the last quarter of 2017, at least, that CitNOW had plateaued.
I don’t remember the exact figures now, but the company was around £60,000 short of where it ought to have been. Their concern wasn’t that the £1 million wouldn’t be reached by some point in 2018. It was the lack of evidence for continued solid growth and the fact that the company was now playing catch-up.
Tenzing was being asked to acquire a company based on a projected £12 million plus annual revenue in January 2018. In other words, January’s recurring revenue should have been at least £1 million, February a bit more, and so on.
I’m sure Alistair and Geoffrey argued that their sales forecast was realistic and very achievable when they were asked to attend a final do-or-die meeting. Nevertheless, it didn’t change the facts of the situation. January’s figures were not going to be any better than November’s or December’s, give or take a few quid. When and where was the slack going to come from?
Tenzing still wanted to buy the company, but now felt that they needed to find a way to protect themselves on the nominally agreed price.
They’d never really queried the original asking price until now, which was smart in hindsight. They obviously needed to like CitNOW enough to enter into a process, but they didn’t begin, as some had done, with any concerns about overvaluation.
A final offer from Tenzing was presented to Alistair and Geoffrey, which was also communicated back to us. After the offer was digested by all concerned, a final meeting several weeks later was called in KPMG’s London office. The leavers were corralled in one office with Hamish****, the remainers in another with the KPMG team trying to get the deal over the line.
The offer in principle was a simple sales target, predicated on an agreed sales price of £30 million, of which £6 million was wrapped up in director’s loan notes. These would pay out on a sliding scale based on a recurring monthly run rate over three consecutive months between £1.1 and £1.2 million. Failure to achieve £1.1 million meant the company was effectively sold for £24 million.
The timeframe was 2018, which meant the last meaningful month to achieve the target was October. Whatever monthly revenue had been achieved by then would almost certainly be reflected through to the end of the year.
It was a deal which made sense to the remainers. It gave Alistair a chance to prove that the sales forecast was entirely achievable, and they would comfortably surpass the £1.2 million monthly target, well in advance of October.
It made less sense to the leavers for one simple reason. We were leaving the company at the point of sale and would have no influence on achieving the new sales target, and consequently, the company's final sales price.
Hamish made sure that this point stuck and offered a nuanced alternative to the remainers. The leavers would only accept half of the downside risk. It meant the remainers would have to sacrifice some of their payout as security to the leavers in the event of an unexpected failure.
Whilst neither side wanted to see the deal fail, and the thought of carrying on with no sale was pretty hideous, it appeared that the need to sell was more pressing for those staying. Hamish’s deal was accepted.
If they’d said no, we would have had to put our exit on hold and continue. Realistically, it probably meant another two years.
Was it a tough pill to swallow for those staying? Probably more so when they missed their new target by a considerable margin, barely scraping past £1 million per month by the end of 2018.
Nick and the old guard at Tenzing had been right.
*CitNOW was our company’s trade name before we sold it in 2018.
**Nick was our European Managing Director.
*** Gordon was our Sales Director.
****Hamish Morrison is the Joint CEO of BHP. At the time, he was the managing partner at BHP, responsible for specialist corporate finance.
Tense but exciting stuff!! 😬