Cumulus - every deal is an unexploded time bomb
by Margaret Heffernan

It's the ultimate accolade. The prospect of selling your company fuels so many fantasies. You imagine smoke-filled rooms, haggling, manoeuvring, and vast sums of money being bandied about. The natural culmination of this day dream is oceans of champagne sprayed willy-nilly and a walk into the sunset.

But when Martin Stanton came to sell his company, things didn't turn out that way. And he did everything right.

Selling your business is the single most stressful, and risky, moment in a company's life. Martin and his business partner, Jeremy Davies, had built their mobile technology company Cumulus, to deliver cutting edge mobile technology. With a DTI loan, a lot of commitment, sweat equity and late nights, they'd established sound partnerships with real customers, become cash positive by the end of Year One, achieved margins of 35 to 40 percent and found a niche that delivered a growth rate of 100 percent per quarter. They had, demonstrably, proved themselves.

But one of the ironies of growth is that, as business comes in faster than cash, you need money to fund expansion. So Cumulus needed either an injection of funds or to join a larger company that could sell more while Martin and Jeremy's team built more. They put the word out quietly and bidders came quickly.

"We had three serious contenders and, of course, they all wanted something different – and we needed to understand their plans." Martin recalls. "One of them wanted us as a rescue team, because their own business was dying. They thought we could turn them around. We ran a mile!"

Ultimately Martin and Jeremy chose to do a cash and stock deal with WIN PLC. As a publicly traded company, WIN's stock had verifiable value, they liked the mixture of cash and stock incentives, they'd already enjoyed a good working relationship together and WIN had a sales force eager to ramp up business. It all looked perfect.

Martin and Jeremy kept on doing smart things. They found reasonable lawyers, prepared to guide them through twelve weeks of due diligence for a win/win fee. They dealt in known assets – cash and stock. Their buyers were serious, the deal kept moving and they had a fall back position. It was still a roller coaster ride.

"We had arranged a second loan from the DTI so that, if the deal went bad, we'd still be in business. Jeremy kept the business going while I worked the deal. I don't know how you could do this without support – from your business partner and from your family because emotionally it is just so tiring." Martin winces at the memory.

"Sure, you're tired after a long day but this was different. You'd have a short day and come out feeling exhausted! You are trying so hard to get it right; so much depends on it. You have forty pages of warranties to read and however much you trust your lawyer, you still have to read them. I was using caffeine to wake up in the morning, nicotine to calm me down and alcohol to get to sleep. All I could think of was Dory, in Finding Nemo: "Keep swimming. Keep swimming.""

The end, when it came, was an anti-climax. " I got my wife Amy to drive me to the lawyer's office – I didn't dare drive – and we spent five hours signing papers. It got so boring, waiting for more pages, that Jeremy and I started watching videos. Because the deal was an announceable event, the money couldn't be transferred until the market closed. So we sat in this grotty pub in Bristol, with a pint of Stella in a plastic glass until we got the word. Oh well, I thought: that's it then."

But it wasn't. An hour after Martin and Jeremy's money was banked, WIN's Chief Executive stepped down. Subsequently, the Chief Financial Officer and the Chief Technology Officer both left and the sales director was replaced. The stock price halved. There was no one left to spearhead the integration of the two businesses.

"I was so frustrated," Martin recalls, "I just about tore myself apart. I felt so much anger. My brain went into an infinite loop, replaying millions of scenarios trying to work through this disorganized mess. I really felt that my business was being destroyed."

It was the ultimate nightmare. Martin and Jeremy didn't make mistakes. What they learned, the hard way, is that every contract is an unexploded time bomb. It sets in stone the way the world is on the day the deal's signed – but even an hour later, that world can change.

The only time I've ever seen the entrepreneurial fantasy (champagne and walking away) come true was when a sole owner could do a cash-only deal and leave. Those situations are rare and typically command a lower price. Earn outs are stressful because you are stuck with a new reality which is, almost always, ambiguous and painful. But not irredeemable.

"It's been nearly a year and, from our perspective, it is positive now. I can protect my team, remunerate them and grow them. The stock price has rebounded. There's a new management team. We've achieved what we wanted. The only difference is that my role isn't close to what I thought it would be. In two weeks, I become COO of the group. And off we go."

© Margaret Heffernan

TOP