Changing hands but protecting the legacy

By Barney Cox, Thursday 13 November 2008

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Building direct mail firm 4DM had left its directors craving time to pursue other interests, but reluctant to just walk away, they opted for a more personal sale

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Charles Grant-Salmon always knew he would eventually get back to being his own boss. The sale of his previous firm, The Flair Press, to newspaper group Adscene, had turned Grant-Salmon into what he calls a city animal, but in 1997 he identified direct mail as the right sector to work in and bought Kettering-based firm Hobs. He then set about building direct mail group 4DM around its mailing business.

At the time of the acquisition, Grant-Salmon realised he would eventually sell the firm and wanted to have time to pursue other activities within print. I wanted to stay relatively small and do three days a week, he says. But I became a victim of the firm’s success.

It was only 10 years later, when he carried out a vendor-initiated and -assisted management buyout (VIAMBO), in November 2007, that he was finally able to achieve his aim of working to that schedule at 4DM. Neither Grant-Salmon, who is chairman and chief executive of 4DM, nor long-term business partner and technical director Les Ritchie, wanted to just pocket their cash and walk away from the company, or to find themselves in conflict with the new owners after it had been sold, so they chose to go down the route of a VIAMBO.

The idea of selling the firm to the management was always in his mind as the best way to ensure continuity, and that relied on having the right people with the right skills in place to take on the day-to-day running of the business. Much of the intervening time between buying Hobs and the VIAMBO was spent finding and nurturing the right talent to take the firm forward.

Mentoring is very important. I did it before with people I worked with at Flair, he says. It’s about identifying weaknesses and working on them, and it’s not just about skills – it’s also about passing on contacts.

The new management team is made up of five directors, and all bar one had been with the firm for several years prior to the deal. James Portsmouth is managing director of Hobs 4DM, the mailing house and biggest part of the business, and is a veteran of the firm with 18 years’ experience. Portsmouth began his career at the firm’s Transcom 4DM division in Worcestershire. Mark Christison is the finance director and has been with the group since 2000, having moved across from 4DM’s accountant, Grant Thornton. Darren Crawford is managing director of the firm’s data and digital print division, Addition 4DM. His background is in IT and he has been with the firm for 13 years. Lance Hill is managing director of the Transcom 4DM division and has been with the firm for five years. He started out at the 4DM group in a sales and business development role, but has a background in print production.

Group sales and marketing director Robin Skinner was the last director to join the firm in January 2007, having previously been in marketing and print sourcing for Barclays. Skinner was a customer of Grant-Salmon back in the Flair Press days, and has direct mail experience from time spent at Colorgraphic and Vertis. When Charles took me on, there was already a grand plan, and they were looking for a sales director, says Skinner.

Once Skinner was in place, the VIAMBO could proceed. The first step was making the group board directors as of March 2007 and handing them the day-to-day running of the firm.

When we decided to make them directors, Les and I moved out to a different office, says Grant-Salmon. They had six months to prove they could make it work. If it was going to go tits up, it would have happened quickly during that time. Obviously the new management team proved themselves, and the VIAMBO went ahead in November 2007.

The firm used Grant Thornton’s corporate division to structure the deal and ensure a fair price was paid, while the two management teams each engaged their own solicitors to handle the legal processes.

The value of the deal, which neither side would disclose, was determined by Grant Thornton based on the firm’s financial results and future projections. For the valuation, and also to ensure that the firm’s bank was comfortable with the change of ownership, a five-year forecast and business plan had to be drawn up. You can’t pluck a figure out of thin air; it has to be approved by the Inland Revenue, says Grant-Salmon .

Christison says: It was done on a market value transaction; it wasn’t a free ride. The deal was made on a very friendly basis. Charles and Les didn’t give it away and we didn’t pay a ridiculous amount.

Grant-Salmon and Ritchie, who held 80% and 20%, respectively, sold the majority of their shares back to the firm in a deferred consideration deal (that is, they will be paid back over the next seven years). In that respect Les and I are like a private equity firm: the cash we’ve invested is being taken out over time, he says.

The new directors then had to buy shares from the company, which, once again, Grant-Salmon says is how a private equity deal would work. I wanted them to put some money in to prove their commitment. I’m a great believer that to focus the mind the amount has to be enough that it would be painful to lose, but not enough to hurt the family.

Following the VIAMBO, Grant-Salmon retains the largest stake in the firm, but the new directors hold the majority between them. Both sides say they are pleased and feel the deal has enabled the business to progress, despite tightening conditions in the market. It’s almost as if as soon as we did the deal, someone flipped a switch and conditions in the market got much tougher, which Charles calls our baptism of fire, says Skinner. Portsmouth adds: Despite that, a lot of people will be surprised by how well we’ve done.

Grant-Salmon says it has given him time, while also offering the team an opportunity. They can do it better than Les and I could on our own, says Grant-Salmon. We feel revitalised as we no longer find ourselves working seven until seven.
The new directors believe that since the deal there has been a change in the way they work, with the added responsibilities making them more open and honest. And they say they find work more enjoyable. They also appreciate the continued, though reduced, presence of Grant-Salmon and Ritchie. It’s a plus that they are involved, and we’ve got them as a sounding board, says Portsmouth.

One reason Grant-Salmon and Ritchie chose to sell was to free them up to focus on the firm’s strategy, which has already borne fruit with an acquisition. In March, the firm bought marketing services firm Direct Link and the UK agency for Italian inline direct mail specialist Venturini.

For now, 4DM isn’t seeking further acquisitions; the primary focus is cross-selling services to existing customers, who have reacted well to the changes, according to Grant-Salmon. The deal has done us a lot of good with customers, as it was done in such an adult way and it ensured continuity, he says. The service that they are used to hasn’t changed.
Financially, the firm is thriving. We have achieved our expectation post buyout of £17m sales for this year and are on course for £20m turnover per annum with the more recent acquisition, says Christison. In addition, with the imminent completion of our audited accounts we expect to be releasing a very healthy profit on the back of this £17m turnover.

So far, the VIAMBO has proved successful on all fronts, but to err on the side of caution, the contracts were drafted to enable Grant-Salmon and Ritchie to step back into day-to-day control. We don’t think we’ll have to; they’re doing better
than we expected, says Grant-Salmon. That gives me a buzz, as well as money.

Inspection lessons: VIAMBOs

  • Trial the new structure for a few months prior to the deal. If anything is going to go wrong it will become apparent in those early days
  • Ensure the deal has caveats that allow you to step back in should problems occur
  • Set a fair price both sides are happy with and that ensures the buyers are focused and hungry to succeed but doesn’t jeopardise their family circumstances
  • Mentor the new management team to ensure they have the right skills prior to the deal and pass on your contacts as well as your knowledge
  • If you are retaining a stake and some involvement, stand back physically and emotionally to let the new management fulfil their roles. Consider relocating to avoid getting involved in day-to-day affairs
  • Get your five-year business and forecasting sorted. Your bank will consider the deal to be a change of ownership even though it stays with the existing management team

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