How to sell a design business: advice from the DBA’s law firm

Designers are a lucky sort; many have the autonomy of setting up their own business, and then getting paid by clients to do something they are both very good at and enjoy.

But the time may come when the question of selling on a design business has to be addressed. Sometimes this can be for positive reasons – the design business needs to grow and therefore needs additional resources from outside the business. Sometimes, it’s age or illness that intervenes.

Four ways to sell a business

The main ways in which design businesses are gotten rid of are:

• Management Buyout: The younger designers want to grow the firm, and so buy some or all of the shares of the business from the older designers. In a bigger consultancy, the management team will buy a large part or all of the company from the parent company.
• Trade Sale: The business is sold to another company, perhaps because the business-owners wish to put more resources into it, or they want to merge it with another company’s operations, or because they do not have a business in this particular marketplace.
• Merger: A merger can be with a similar creative business, in order to increase size, or with a slightly different creative business, in order to increase the scope of the design studio’s offering. However, the reality is that most mergers are actually trade sales – one entity is taking over another.
• Floatation: A really successful design business that has grown and become international could be floated by an initial public offering on a stock exchange or other share market. This really only applies to very successful and large design studios. In my experience, companies with a turnover of less than £250 million need not apply.

Which method should I choose?

Take a realistic look at yourself and plan early. You need to look at your marketplace to identify whether a trade sale is a possibility and, if so, who the likely candidates might be.

Or if you feel that you have a stable professional business and that in-house succession would be the way to enable your studio to carry on, then you should be identifying and encouraging the “managers” – the next generation of creatives who will take on your business and buy you out – to step up.

For most businesses, even large, international designers and companies, the preferred exit route will change as business conditions change and people come and go. The real truth is that usually the intervention of serendipity is pretty decisive.

Encouraging a happy accident is very important – professional networking, making rivals and competitors aware of you, and attending trade events, such as the Design Business Association (DBA) Design Effectiveness Awards, are crucial in getting your business’ name out there. They are even still important if you are determined to go down the management buyout route, because most design businesses never really know whether the chosen next generation are going to stay with the business, or whether they may bail out or fall ill.

It goes without saying that receiving good professional advice, particularly from lawyers and accountants, is also a great help. It is quite difficult to sustain a great creative business if you do not have access to professional support.

Give your project a code name

Once you have decided to start transferring over your business, you should think up a code word for the project. Designers are already thoroughly familiar with brands given that they are often advising their clients about them. A code word is effectively a brand and it has exactly the same effect as your clients’ brands – it transforms a concept into a project.

It also enables people to buy in to a project, and it retains confidentiality. Keep your brand simple and try to make it as neutral and innocuous as possible – don’t try to be clever and make it relate in some way to the project!

Get your housekeeping done

Whatever type of transaction you are getting into, it is very likely that your business is going to come under scrutiny. You need to make sure that it is in a good state when it does. The financial, real estate, branding, trademarking and intellectual property (IP), human resources (HR), and compliance aspects of your business need to be in good shape. It is quite common for a business to make a lucrative offer to another business, then carry out due diligence and reduce the offer considerably as a result. The buying business needs to compensate for the “perceived cost” of rectifying the other business’ failures.

So make sure you consult your professional advisors. They will be able to give you a checklist of compliance issues for your finance director to sort out before you make a deal.

Moving over employees

The process of moving employees from one business to another can be complex or simple, based on what you’re doing with your business. It comes down to a TUPE transfer, which stands for the Transfer of Undertakings (Protection of Employment) Regulations, and its job is to move employees from the old employer to the new one by law.

If you selling the shares of a company, for example in a management buyout, then the TUPE transfer does not apply – your company stays in existence and simply passes over to a new owner.

But if you are selling a business, such as in a trade sale, then TUPE does apply. The jobs of your employees will be protected and you must take legal, professional advice about compliance with their rights.

Protecting information

Information about what is happening is highly sensitive – one of the many reasons it is important to have a code word.

If you leave your screen on and go to the toilet, then your colleagues may see the subject of an email. If it says “Purple Rain” then that is pretty covert and innocuous. If it says “proposed sale of the company” then that will certainly be a giveaway to anyone who sees it.

Keep people informed

In most creative businesses, there are groups of people who tend to be very important. This includes clients, support staff and employees, contractors and freelancers such as photographers, illustrators, filmmakers and models, for example.

These people need to be told about what is happening, either before or after the sale, and you need to carefully analyse the categories that affect your business. Look at the damage that could be done by a leak of information, what loyalty you owe these different people and they owe you, then you will need to share that analysis with any purchaser (whether in-house management buyout or a trade sale) and agree an information plan.

Be honest about the business in negotiations

Before selling a business, there will be due diligence carried out; this is an investigation or appraisal completed by a prospective buyer to assess the benefits and dangers of buying a business, and therefore its commercial potential.

It is very important to make sure that there is a full record of what information has been disclosed in the due diligence process, because when you come to sell the business, you will certainly have to sign “warranties”. These are promises about the business and if these turn out to be untrue – for example, stating that the business does not have any current legal disputes with other companies when it does – then there will be a claw back of the money paid.

Warranties are modified by a “disclosure letter” which sets out all the facts that need to be stated in order to make the warranty true. For example, against the warranty “the business is not in litigation (undertaking a legal dispute)” you might put in the disclosure letter “we are currently arguing with the local authority about the level of business rates”.

Your professional advisors should have put legally enforceable rules in place, to ensure that your business’ confidential information can only be used for the due diligence test.
Expect the negotiation phase to be chaotic, stressful and sometimes aggressive.

And finally – beware takeover-itis

Be aware of two inevitable but unforeseen outcomes of a takeover:

• Post-takeover blues: the process of a takeover can be highly stressful, exciting and hopefully financially rewarding. When it’s all over, lots of people will feel very flat and uncertain of their future. It is important to recognise that this will happen, both for the sellers and also the staff. Sympathetic straight talking, tea drinking and getting enough rest all help!
• Takeover-itis: the business’ culture and organisation may now be different to what it was before. Some people who were previously used to making lots of decisions and having a lot of responsibility could suddenly find that they become accountable to third parties, sometimes third party committees. Large companies are managed in a completely different way to small companies and for the management teams, no matter how much you are assured that it will be business-as-usual, it will not. Be aware that you are going to have to be very flexible, and do your best to comply with a different set of rules, which you may not initially “get”.

Change is good

Every business goes through transformation all the time – any business that does not is probably going to fail. A transfer of the business is nothing more than an abrupt change. Identifying that you want it, trying to achieve it, achieving it and then living with it are all normal business skills, which creatives should be able to manage, providing they understand them and prepare for them.

James Selby Bennett is senior partner at law firm Humphries Kirk, which has provided legal advice and services to the Design Business Association (DBA) and its member design businesses for 30 years, helping them settle legal disputes such as around intellectual property, and sell and close their businesses.