TAE EP 11: How And When To Take A Company Public – Martin Higginson

Summary:

Martin Higginson is an ultimate entrepreneur he’s built multiple companies, exited four of them and raised capital for another 7 through the public markets. He now builds companies, puts a management team in place, takes them public and moves on to the next deal.

Show notes:

About Martin
Lessons learned from selling
The Public Market
Staying in ‘Control’ even in a Public Market
Alternative Investment Market Aim
Buying and building strategy
Building out media to the buy now consumer
Diversifying revenue streams

Contacting Martin:

The best way to contact Martin is through us. Please feel free to send us an email [email protected]

Mentioned in this episode:

Article:

We are live today on Truth About Exits and I've invited Martin Higginson to join us. We have a lot to cover. I first met Martin late last year in 2018 when he was a part of Digital Box, they were looking for acquisitions, which that company we'll be talking about shortly. Before hitting record Martin and I were talking a little bit about his background which we'll get into, which includes exiting multiple companies and also listing publicly multiple companies, which Digital Box was one of those. We'll jump into that. Martin, thanks for jumping on the call.

You're welcome. Good to speak to you Coran.

Okay. So when people ask you what do you do being the little bit, I know about you so far, how do you actually answer that question?

Got It. Well that is a difficult question because I have fingers in many pies. Having been investing in sort of digital for probably the last, what seems like 30 odd years in one way, shape or form. I think the answer it takes a little longer than people often expect. Currently I'm chief executive, a business called Imotion I double m, o, t I o n which is a virtual reality business. But before that I was chief Exec at a business called Digital Box, which was how we met and whilst we now have management team in place on that I'm still actively involved as a non EXEC director.

Excellent. Okay. Yeah, it's pretty complicated, I guess is how you answer that. Let's maybe give the listeners a little bit of an overview of you as an entrepreneur and how you got started and then how you got into the public market side of things and then we'll dig into Digital Box a little bit.

Yeah okay. My career as an entrepreneur started when I was working as a journalist, a motorcycle journalist, age probably 18/19 and I managed to persuade my then boss that I had just seen these new BMX bikes, so we managed to create a new title called BMX News, which was a weekly newspaper. Sadly, about 13 weeks later, I got hauled into my boss's office and told me that he was not only closing the magazine down or the newspaper down but he was also closing my job down with it. I then went home that evening, persuaded my father to lend me some money, went back the following morning, persuaded my boss to give me the title and then launched it as my own weekly newspaper. Doing everything from writing, taking pictures, selling the adverts, delivering it to the new standards and then covering events at the weekend. We quickly came to the conclusion that a weekly newspaper wasn't the right thing and we changed it into a colour magazine.

After about sort of three months and a year it become Britain's biggest selling boys magazine and we were running it as a fortnightly publication and then we launched a monthly and we were selling probably somewhere in the region of about 600,000 copies every single month. So it became a sort of roaring success and that led to my first sort of sale of business. I sold that business probably aged 20 to a company called IPC magazines, which was a large European publisher and went to work for them as a publishing director on their youth group for about three years. That was quite interesting. I then left sort of quickly coming to the conclusion that I wasn't really suitable to be an employee and set up my own business again. I set up a number of magazines got up to about a hundred staff quite quickly over about 13/14 magazines.

But this was probably the mid 80's, definitely the mid eighties and I think interest rates were then running it about sort of 16/17% and we had a lot of advertisers that whilst on paper we were making money. In reality they just weren't paying and we weren't making any cash. I came up with two ideas. One was to launch a sort of pop, one shot, it was a magazine that unfolded out to be a giant poster, which was the sort of first idea. We did a thing called new kids on the block and we created a poster magazine around those guys and that became a roaring success. At the same time we were approached by a premium rate telephany company on 0890 numbers in the UK and 1900 numbers in the US and they approached us and said look, we want to run a premium rate telephany line on the back of your magazine.

If we can do that, we'll share revenues with you. Oh Wow. I just naively had no idea about these things and said, yes that seems like a good idea. The interesting thing was that actually generated more money than the magazine.

Wow.

Considerably more and I think the lesson or the lesson in selling my first business was to make sure that you get good advice because I think in that business we definitely sold it too cheaply. I think the second advice that I learned out of doing the premium rate telephany to keep your eyes open and look at what's happening around you because in actually doing that and educating myself very quickly, we actually found ourselves in a business that we didn't even know anything about and very quickly we morphed our magazine business into a premium rate telephany business.

We closed down the magazine. We went from sort of 112 staff to three staff overnight. We went from having a break even business to a business that was generating in excess of a million pounds profit a year back in sort of the early 90s it was a real transformation of a business. But it really showed me that just actually by keeping your eyes open and looking at different trends was how you're going to sort of survive as an entrepreneur. We sold that to a company called Scottish power, which was a big utility company that was doing a roll up of telephany businesses. Then when I joined them in the late 90’s I was given the task of going and acquiring an Internet service provider in the UK called Demon Internet. We acquired that within months of me joining Scottish power. I ran that business as the MD of that business on sort of MD of internet and interactive for a Scottish power or what was called Scottish telecomm. Then it was listed in 2000 and this was my sort of first foray into actually publicly listing a business. We listed it in 2000 for just shy of 2 billion pounds. That really, again, keeping my eyes wide open, just educated me about the benefits and the accessibility of huge amounts of cash in the public markets. I think if you get something that's on trend and is in a rising tide, then the amount of cash that is available is just mind blowing.

Okay. Can I just pause there for a minute? I want to dig into this topic just a little bit more. A number of people I've talked to recently does about 50/50 split of people either going public, looking to go public or afraid of going public. With your experience now have multiple listings and we'll get more into that in a minute. But can you just quickly at a high level explain the upside and downside of listing a business publicly?

Well, the public markets are good and bad. If you do well, they'll overcompensate you. If you do badly, they will kick you like you've never been kicked before. There are three things that you need to do in the public market and that's meet, beat and repeat. In other words, you've got to meet the targets that you set or the analysts set for your business. You've got to try and beat those. Not too much but you've just got to over exceed expectations. Then you've got to do all the same again next year. If you do that you'll have a roaring success and that's easier said in a growing business, that's hard. But the benefits of the public markets is if you catch the tide at the right time, it allows you to still be in control of your business whilst actually allowing you access to capital to grow it and access to capital to take some money off the table. It can be a really nice environment. But as I said the downside of that is it will be ruthless in terms of if you make a mistake, then it will hit you like an express train.

Wow. Okay. I want to dig into a couple of those points. Number one, maintaining control. That is typically an entrepreneur's worst nightmare, is losing control of their business. How do you maintain control of your business after your listed and public?

Well it depends on how much you own. Let's just assume that you own 100% of the business and you can you normally look for about a 25% free float so you can still own 50/60% of the business and it be listed. I think as entrepreneurs we become obsessed with this word control. I think you can still run your business. I mean, a good friend of mine that I advised he listed a business called boohoo about two or three years ago and it's now just shy of worth 3 billion market cap. He's now gone from being a reasonably wealthy guy to being a billionaire in his own right. I think he's probably been one of the best things he's ever done because he's still in control of his business. He and his family, whilst only owning probably 20% of the business, they're still very much in control and the market's back them. But what it has helped him to do is take a few hundred million pounds off the table. Therefore securing himself and his family's wealth sort of forever.

Really just some walking around money. Yeah, everything in life is relative my friend.

absolutely. Absolutely. Forgive me if this is a little bit basic but I get asked this quite a lot. I'm going to play newbie in this scenario and to be honest I've not been involved in a public listing either. Half these questions are from me directly. When you say unlocking wealth, to unlock the wealth once your friend listed or in your case, if that's an easier example, do you literally need to sell those shares to release that capital or do you have some other options?

No in the main you will sell your own shares. Let's just say you have a business that's worth, the market's valued at 10 million pounds pre raising new money. Then you may say well look I want to raise 3 million of new money. That is what's called new money is the money that goes into the business. Then there's another term that's called old money. That is effectively existing shareholders selling down. You might raise let's say 5 million of which 2 million would be old. In other words, the founders selling some shares and 3 million would be new money. You're getting money in to grow your business whilst also actually exiting some of your own shares and still staying in control.

Is there a limit on what's acceptable in that scenario, I can imagine if you're going public and wanting to take out as much capital as you can as the founder investors coming in might not look too kindly on that.

Yeah. That depends on the size of the business. If you've got a business that you're listing at let's say hundreds of millions of pounds then you taking off tens of millions is going to be fine. Investors will always look for founders to be wedded to the business. They will always look for you to have a lot of skin in the game. But selling 5 or 10% of your stock is acceptable. But I think if you start selling more than that then there are question marks as to do you actually believe in what you're trying to do? I'm not prepared to give you my growth capital cash for you to then sort of just to put in your own pockets. There's always a fine line to tread and I think you've just got to be careful of that. But I think if you play it carefully and you've got good advisors then you could actually do both.

Okay, great. What's the indicators you look for now? Obviously, like we mentioned at the top of the show you were involved with Digital Box and the primary goal there was to list and then acquire companies, which is how we met. At what point, what are the indicators or at what point if you're on trend like you mentioned do you actually go to the public market? Do you need a certain amount of revenue? Is it business plan? How do you balance those two things and know when there's a good time to list?

You don't necessarily need to be profitable the business that I'm chief executive of emotion isn't profitable. We're investing heavily in the VR space but we genuinely believe that that will have a hockey stick. I think when you refer to Digital Box and indeed how we actually met Digital Box is really about a buy and build strategy. What we needed in that business, we have something with Entertainment Daily that is very successful. We have something that's profitable. When we listed we bought into the business called the Daily Mash which is a satirical sort of website, predominantly based in the UK. But what it's given us the ability to do is to actually use a combination of a cash that we raised through the listing and b paper. When we go and see people, we can sort of say, look we'll give you 50% cash, we will give you 50% paper?

They know that paper at some stage is tradable. It means we can do deals. It means we can also lock people in to our journey. If people believe in what we're trying to do then hopefully the paper will have an increased value in years to come. When we did the deal with the Daily Mash, we gave them I think we gave them 70% in cash and we gave them 30% in paper. With that paper it means that they're wedded to our side. We locked the paper up for a year or so. It means they can't sell it. They've got to work hard in order to enhance the value of that paper and done right. It can really help grow the business.

Okay, that makes a lot of sense. I guess that's similar to well different than using say commercial debt on the acquisition side. You can use that leverage of the paper being available to get a more creative deal structure and have less cash down today and then also have partners to help you grow certain things within the business to make the whole business stronger.

That makes a lot of sense. Are you still using leverage as far as commercial debt when doing acquisitions or is it all cash and then paper like you mentioned?

I mean all the businesses that were involved in we have no debt and debt is very challenging and the less you're buying a traditional type business then often it can be quite hard to put debt in.

Now against profits and things people will give you some debt I think where possible and where you've got certainty than debt's a very good tool. But if things don't go quite as planned then in the public markets you can end up in what's called a death spiral where you haven't got the money to pay out or to pay for the debt. The company isn't making the money that it was once making and therefore you have to go and try and raise money at a different value. That can be quite hard. I think when you're doing deals in the public markets, things to avoid sort of things like open ended earn outs cause you can do an open ended earn out where you promised to give shares to pay for the earnout. But then if your share price falls for whatever reason but of your core business isn't doing as well, that person could end up owning all of your business because you're in this death spiral.

I think you've just got to be a bit careful about how you structure deals and how you use paper. You're better off paying on the nose with that. Strong advice is trying to avoid lengthier earn outs in the public market scenario.

Hmm. That's interesting. What are some of the mechanisms you can use, obviously people need advisors to do this, but just in general terms what are the mechanisms you'd like to use to cover the downside in a scenario like that?

Well, I think proper due diligence is really, really important. If you can get somebody that's got also got skin in the game with you and in other words giving them public listing paper then their interests are aligned with your interests. If you've got somebody that you're acquiring then you can look at that. I often think, one of the things we looked at Coran when we started talking was areas that are potentially undervalued and how can you take some of those products that are or sectors that are undervalued that you think actually if you, if you spin them in a slightly different way, I've got a different valuation. It's often, if you're in different sectors that and then they have different multiples if you get into a tech sector and that's where we've got a 10-20 times earnings multiple. But if you're in an Amazon sellers area, then that's what we got two to three times multiple. It's just how do you sort of perceive those. How you maybe move things around to create slightly different businesses that I've got a slightly different sort of outward looking skew.

Absolutely. Yeah. There's a lot of multiple arbitrage speak in our space, especially in the ECOMMERCE, Amazon branded product space. Very few people are looking at going public though. I've spoken to a couple but you were one of the first actually that really we started having these conversations, so let's hold that there for a minute. We'll loop back to that. I'd really like to talk about AIM, the alternative investment markets on the London Stock Exchange, which is what you used for Digital Box to go public. How did you choose that market and also could you explain what that is just a little bit?

Yeah, I mean Aim is the junior market of the London stock exchange and it is a lot less onerous than the full market on the full market. You have to do sort of quarterly reporting. The costs of being on the full market penal there'll probably be a few hundred thousand pounds a year. Whereas being on the junior market, it's tens of thousands of pounds a year maybe sort of 60 - 70 pounds a year. The cost benefit is greater. I think there are a lot of funds that are available that you can access now on the junior market. There are a lot of companies that are big companies, multi billion pound companies Boohoo is one that I spoke about earlier. That's an AIM listed company. There are a lot of benefits to AIM, it's less onerous in terms of the regulatory environment, which I think is important. I think it gives you the flexibility and it's perfect for growth companies. I think it's good. I think probably in terms of junior markets, I think the UK leads the field in that area.

Hmm, absolutely. And what's the process like to become listed on aim is the, what sort of diligence do you need to provide and all that sort of stuff to get going? What sort of advisors would you recommend people engage if they're looking at going into a secondary market?

Yeah, I mean you need to find a what's called a nominated advisor. I mean that's the first port of call. So they will then kick the tires on your business and then they will look. They will ascertain whether that business has got the merits to be a listed entity, whether that be on the full market or on aim. But if you just stay with Aim, I think that's probably the easiest route. Then you then need brokers. Some nominated advisors have brokers as well. The broker's job is to go and raise you the cash to help get you in front of fund managers and to actually help raise that money. Then you'll normally have probably about two weeks worth of meetings. You'll do sort of circa eight to 10 meetings a day and you'll tell potential investors about your business. Then what's called an analyst who sits on with a nominated advisor we'll write reports on your business and they will give a view as to what they think the outlook is for your business and what their projections are. As the company you're not allowed to give projections. What you do is you give guidance to your nominated adviser who's in as an analyst, who then gives his forecast. What do you think's the business can do and can achieve? Then as I said you sit down in front of potential investors, you'll normally have an hour's meeting. In reality that's about 40 minutes talking about your business and you've got to get a real elevator pitch. You have to engage the people and not only in your you and your business but everything else around it, the sector etc and then they'll decide quickly whether they want to invest.

How long has that process typically with the investor groups? Do they make the decisions on the spot do they go back to their board in this scenario?

I mean I'm running around or running people's money but they can all make their own decisions. Normally when you see somebody they’ve looked into that diligence in the background, have read the analyst's report, someone wants to do a little bit more work. But normally from beginning to end, from start to the road show to the end, it's about a two week process.

Wow. That's really fast. Okay, excellent.

The listing process, so doing all the work and getting everything done. If you really want to speed it up, you can probably do it in 12 weeks.

Wow. That's amazing. Thanks for the explanation on that. I find that really eye opening as to unlocking alternative forms of capital, which is what all this is about. I've noticed with Digital Box specifically early on when we were talking there was as you mentioned there's a management team in place on the business now and you're on to the next business. How do you view getting a business to a point where a management team can come in and where do you source that management team and Ceos to run with your vision and then move on to the next thing?

Well, I if we just take Digital Box as a prime example we brought on a guy called James Carter, really assisted a commercial director and to work with me. Then we brought in a guy called Jim Douglas as the operations director and both of them worked very closely with me for about 12 months and I set the direction of travel that we were going in and it became very clear then having got the business into flow that what we needed and I think this is very important for entrepreneurs. Entrepreneurs are great at starting businesses. They're not necessarily the best people to run businesses. I think all entrepreneurs need to remember that. It's about taking good to great, not bad to good. I think once a business is in flow, then it's very important to try and look for a management team to take over and to almost take a step back as the entrepreneur.

Because entrepreneurs are notoriously bad at letting the status quo just happen. They always want to tinker and try and do the next thing. More often than not, they'll end up ruining the business by doing that. If somebody once said to me that there are lots of people that run businesses very well. There's very few entrepreneurs. What you've gotta to do is take your bit of entrepreneurs to greatness and then find somebody of which there are plenty to actually run it. We've got in somebody who's very good at running a business, he was at a business called EMAP PLC, which was a huge publishing company for many years. He ran a title and a business called FHM, which was a sort of guys magazine, and he ran it and took it to a stage where it was delivering 11 million pounds of profit per annum.

He's more than capable of doing this. Our strategy really now is about buying and building. It's about buying. Yeah. Our general belief was and my direction of travel was that more and more magazines are going to go online. That print is going to start falling off, that you're going to want instant gratification, whether that be through Facebook or Instagram or other forms of social media, that e-commerce is going to become much more about the mobile phone and you're going to start to click and buy and a lot of those things will be interlinked with to what you're actually reading. If you're reading, I don't know, let's say a mountain bike magazine, then if you see something that you want within an article then you just want to be able to click and buy it and you want to be able to do all of that. Potentially using Amazon as the delivery mechanism from this single ecosystem and this single world of your mobile phone and that's a general belief of that business and now we've got capital and paper, we can actually go on that buy and build strategy.

Yeah, absolutely. That makes a ton of sense. I've been at a number of ecommerce conferences in the past couple months and one thing that I noticed as a trend was not from any of the speaker's mind you but from people I was talking to at the events were all saying I seem to be buying more of Instagram now because of the ads being direct to the product. It makes a ton of sense if you're reading an article, if there's some sort of comparison, you just want it. That's the great thing about the trend in consumer right now is if you want it, you want it now and you want it to be seamless? I think that makes a ton of sense. We have a customer, a client right now that's in the travel men's fashion brand and they actually paid for to be promoted in GQ in the UK actually. I was thinking this myself, if I saw this in the magazine, I'd want to click on it straight away. That's one of the things with traditional paper magazines is you can't click the paper. But in the digital space it's a no brainer. I think that's a really good smart strategy. What type of companies are you looking to acquire now you're looking for more media properties, you're looking for physical product companies in between. What's the mandate?

I think it's a combination of the two things. I mean look at our firm belief is and always has been is that the mobile is going to become the number one sort of communication tool. It's not only that it's going to become the number one buying tool and the more everything is sort of integrated now into your habits and the more your credit cards are integrating into that phone that I think the more immediacy and simplicity is going to happen. Whether it be mountain biking or whether it be a leisure product or whatever, I think there's a way of trying to extend these things. When we started speaking Coran one of the things that I was interested in is how do we take I dunno a home dec or sort of Amazon product and how do we then extend that to sort of offer, start offering magazine solutions and start offering some editorial around what is a buying site. How do we take the buying site and extend that into a magazine as opposed to how do we take a magazine and extending into a buying product? I think that's where I'm really interested. Then that's where the team's interested in what can we acquire that allows us that elasticity to take something that is purely a pull mechanism that becomes a sort of push pull relationship.

Oh Great. I think that's a really big advantage that you have. Being able to build out the media. That's interesting to a specific target market. A lot of the clients that we deal with that Amazon specific really struggle with that they figure out the product game, how to create better products, better mousetraps and create some great brands around this. But outside of Amazon they really struggle because they don't have that skill set. I think that could be a really interesting play coming in, like you mentioned the multiples being lower and then once you build out these content sites, media sites around that topic, that will lead to more sales and make the business actually more robust. Even the business on its own, let alone being as part of the umbrella which is Digital Box. I like that strategy.

Yeah and I would encourage any of your listeners to really think about that and if you've got something that is a great selling site then that has got sort of good editorial sort of connotations that I think we can help really sort of merge that into sort of something that's totally different. Certainly Instagram is something that is important to us, anybody who's selling a lot of stuff on Instagram. We're very keen to talk to because I think that's going to be a growing area. One of the things we want to sort of try and dilute is our complete reliance on Facebook. At the moment, probably 80/90% of our business comes via Facebook and whilst that's good it's also bad that I think any business you don't want to be reliant on any single source more than sort of 20/25% of your total revenues.

Absolutely. Absolutely. That's what a lot of the larger investors, strategic investors and larger financial investors, private equity groups, that's what they're looking for. They're looking for diversification, baked in diversified revenue sources, having that direct to consumer focus and actually controlling the customer, which is one downside of Amazon. You don't actually have that direct contact with the customer necessarily. That's a good strategy.

I know that's one of the reasons that valuations are low on amazon stuff because everybody is terrified that Amazon, at some point he's going to just sort of come and eat your lunch now whether they will or won't. I think if it becomes part of a larger conglomerate where you're using Amazon as a delivery method. I'm not totally convinced that Amazon is going to want to sort of eat everybody's lunch in this sort of huge long tail of a business.

Absolutely. Yeah. I think there's quite a bit of fear around the space. Some of it is founded. There's few buyers that are really comfortable with the space and I think being on the leading edge there and having access to capital instead of debt via the public raise that you've done gives you more options because you're bringing cash to the table. It gives you more longevity and you can weather some of those storms potentially as well, which is great. What we're actually seeing is some companies getting to quite large size, middle market, lower middle market size businesses, 10-20 million plus in revenue that have one single revenue channel. I think there's quite a few businesses that have proved a model but once you can build in that extra audience and make the business more robust there's a big win to be had there for sure.

Yeah. I think that that's where we would like to do sort of business with you and your listeners really is if to sort of just try and join those dots together. Instagram big, big tick in the box for us. We're not against Amazon we think it's right where we want to see is something that we can then extend some editorial values into that offering.

Hmm, absolutely. How's the best way for people to get in touch if they do have an Instagram based business or Amazon based business and they'd like to get in touch with your team at Digital Box?

Yeah, I think probably the best way is either through yourself as brokers what we want and you have a very clear mandate or people can contact us directly. But I think in the first instance will probably help. It's great to go through you and then you can sort of vet some of this stuff because the trouble is in this business you've gotta kiss a lot of frogs to get to the right person.

Absolutely. That's my whole day is kissing a lot of frogs.

We'd rather you guys did it and then came to us with the right products, which will allow us to make quicker decisions, allow us to move much more rapidly.

Sure. Absolutely. Well, if anyone listening is interested in exploring these opportunities further, please reach out and we'll definitely vet those for you and bring the good ones over. Awesome. Well this has been really a great episode as far as shifting mindset away from what everyone's talking about. I really appreciate that. Is that any advice you would give it to someone and not specific advice you've done, the advice piece. Is there anything you would do differently? If you were to go list another company via AIM, what would you do differently than say the most recent Digital Box listing?

No, I think it's all about timing. With Digital Box listing the timing wasn't perfect. The markets were very, very difficult and as a consequence you've got to sort of work out how best to raise the money. Timing is everything and there's a great saying in the public market so that if the ducks are quacking then that you should feed them. In other words, that if you've got a market that is very buoyant that's a great time to list your business. Just look for all the signs, look at what's going on around you, you've got to make sure you're in the right sector make sure that the story is very, very simple to tell. And I think if you can do all of that, then you certainly improve your chances of success.

Awesome. That sounds like some solid advice there Martin, and again, thanks for coming on the show and we'll link up to Digital Box and anything else you'd like to share with our listeners on the show notes about this episode. But thanks so much for jumping on the call.

Thanks for having me. Awesome.

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