ACHIEVING A SUCCESSFUL EXIT FOR SHAREHOLDERS
Achieving a successful exit for shareholders is the primary goal for the chairman of a private equity backed business.
Here I share my top tips that lead to a successful exit and the role of the chairman in the process.
The primary goal for the directors of a private equity backed company is to build their business and achieve a successful exit to a buyer, and return a profit to their shareholders.
Building the company so that it has significantly increased in value is just the first challenge, but managing the exit process where investors realise their return on investment, is of equal importance.
The Chairman’s role in securing an exit is pivotal and he or she needs to be the master salesman and driving force behind the process.
On most occasions when selling a company, you will be dealing with very smart potential buyers.
If you are selling to a large public company, they will likely have an in-house acquisition team and you can be sure they will have a lot of acquisition experience.
In a secondary buyout where you are selling to a private-equity firm, you can be certain you are dealing with people who know what they are doing.
Potential buyers will be very quick to understand your business, your market and the company’s potential under their ownership. They will be experienced in valuing businesses and assessing likely success and risks. It is essential you engage the process with equal professionalism.
If you are selling out to a sizeable trade buyer, there will often be several parts of their organisation involved in the acquisition. There will be the operating division or subsidiary who has the strategic interest in what you do. There will also be a central acquisition team comprising Corporate Finance, Corporate Finance Lawyers, and Human Resources. In addition, a lot of companies will augment their resources by using external M&A advisers.
Managing the complexities between the buyer’s functions and the politics can be complicated and sometimes very tricky, especially because you are working from the outside. Nevertheless, the chairman must tightly manage the whole process and be a driving force behind successfully reaching the exit.
If any of the buyer’s key personnel go cold on the opportunity, the whole deal can fail. It is the chairman’s job to continually assess how all parties are feeling about the acquisition and to define what action is needed to re-establish confidence and to keep the whole process on track.
In my experience it serves well to clearly define the roles of your directors and your private-equity team in the exit process. The chairman should be the lead orchestrator with your investors and management team working to the chairman’s agenda.
Normally your private-equity investor will lead on the selection of a corporate finance advisor, the compilation of a Sale Prospectus and on the process of identifying target acquirers. The management team, in addition to running the business, will provide the strategic presentations and participate in buyer meetings.
Compiling a good Sale Prospectus is the starting point. This is normally written by your M&A advisor with input from key members of the board and staff. It tells the success story of the company and highlights its future potential.
A good corporate finance/M&A adviser will help identify potential acquirers of the business alongside the director’s own knowledge of the strategic players in the market. It is important to identify and engage with those that are likely to offer a premium price because of closest strategic fit.
It is essential to have a comprehensive business plan. All businesses should have a comprehensive business plan as a matter of course and it is a valuable contributor in a sale process. The plan should comprise divisional level business plans as well as total company. The format of the business plan that works well for me can be seen here.
All your key functional managers in your company should compile a first-class presentation to explain their operation. This should include performance and planned achievements. The presentations should be regularly updated. It is within the chairman’s role to help shape these presentations considering his or her knowledge of the potential buyer. Very importantly, the chairman should thoroughly rehearse the functional presentations.
I summarise the key points:
- The chairman is responsible for driving the exit process with key supporting activity from private-equity investors and the management team.
- It is important to engage a good Corporate Finance/M&A advisor that understands your business and market and they put together a quality Sale Prospectus.
- Focus your attention on the key market players that can deliver a premium price for the business.
- Always engage with multiple potential buyers to create some market tension. This keeps all parties keen and the price up. Look to secure exclusivity as soon as possible with a thoroughly qualified prospect that has the facility and motivation to complete the deal.
- As in all sales situations, qualify your prospect. Don’t delude yourself that you have a good exit prospect until you see for yourself the reasons why your business is a good strategic fit to the potential acquirer. Be pretty sure you can get the deal over the line.
- Get to understand the motivations of potential acquirers, their structure and all the key decision makers before getting into detailed meetings and presentations.
- The chairman should stay in good contact with all the key decision makers throughout the process and monitor the mood and politics of the acquiring organisation. It is the chairman’s responsibility to initiate and orchestrate all responses and actions that address any shifting attitudes or positions of the acquiring teams.
- The chairman needs to keep the CEO and management team focussed on running the business while still having the team involved in acquisition discussions and presentations. It is all too easy for the CEO and team to take their eye off the ball in running the business. It can be a big distraction. Any drop in trading performance will certainly influence price achieved.
- The chairman should tightly control the quality of all reports and presentations to be given to the potential acquirer. The chairman must be prepared to step in and help write presentations and must thoroughly rehearse the management team before meetings.
- Be prepared to handle any last-minute concerns by keeping all the presentations up to date.
- A lot of data and information will be going across to the potential buyer. If there are discrepancies in the information provided, it can unsettle the buyer. Make sure someone such as your finance director, is nominated to be the central controller of all that data. Nothing must pass from the company or your M&A advisor across to the buyer without the controller’s check that it is appropriate, relevant and accurate.
- Make sure all meetings are in a professional office environment. Don’t attempt to handle things over lunch or dinner. It is very difficult to control conversations when you have the distractions of a restaurant. Too many mistakes can be made when you are off guard in a social environment.
To illustrate the principles explained above I am setting out two exit case studies that I led as chairman:
Claims Management Group (CMGL) – Exit to Capita Plc for £32m
The story of Claims Management Group (CMGL) is an interesting example of how my investors and me secured a successful exit for management and private equity investors alike.
At CMGL, I was Executive Chairman brought in by the private equity investor to deal quickly with performance issues. The company was sliding into an increasingly loss-making situation and the closest strategic customer was defecting rapidly to a competitor for no apparent reason.
Cutting a long story short, the profit performance issues were dealt with by cutting some jobs and securing a turnaround of our defecting customer. Within three months the company was back to making money.
I picked up from market sources that Capita Plc were in an acquisition negotiation with one of our main competitors and I discussed this with my investor. I thought we should see if we could knock out that deal and have Capita Plc desire to acquire CMGL instead.
We made enquiries and soon got the attention of the operating division of Capita Plc that would be strategically interested in us. The first challenge was to overcome the perceptions caused by the performance issues of months before. My investor and I had our first meetings with the Capita Plc CEO, their operating division, and acquisitions team. It wasn’t long before the negotiations with our competitor were dropped and negotiations with us were apace.
My PE investor concentrated on the financial arguments supporting valuation, the preparation of information to support due diligence, and the inevitable arguments over the definition of working capital. My role was to keep the acquiring operating division highly desirous of an acquisition to the point where they would be pressurising the acquisition team not to mess up such an important deal with any financial and legal technicalities.
This was achieved through obsessive attention to the quality of business plans, reports and formal presentations made to Capita Plc. The performance hiccups of the recent past were soon put aside once the story of current performance, pipeline and future potential were conveyed. I concentrated on writing all the divisional reports and presentations and rehearsed all my divisional directors in their presentations. There were customer visits involved and these were tightly planned, rehearsed and orchestrated.
The richness of the presentations paid dividends. After the acquisition was complete, the Capita Plc divisional CEO said to me “It was the CMGL divisional presentations and business plans that did it for us.”
Key to it all is when managing an exit, you must make it your mission to understand the strategic and political pulse points of a potential acquirer and make extraordinary efforts to keep everyone on track.
COFFEE NATION/COSTA EXPRESS – Exitedto Costa Coffee/Whitbread Plc for £59.5m
My second example is Coffee Nation and our very successful exit to Costa Coffee and Whitbread Plc.
Coffee Nation was the leading self-serve coffee company supplying the public through retail and forecourt partners such as Tesco, Moto, Sainsbury and Welcome Break.
It was my PE investor from CMGL working closely again with me on the development and exit of Coffee Nation. The story behind the building of Coffee Nation to over 900 sites is already mentioned elsewhere on this site. See here. In this article I am concentrating on the exit process and highlighting the main principles behind a successful exit.
The Bean-to-cup, Coffee-to-Go, market was dominated by Coffee Nation who had had a clear run servicing the demand for quality coffee while people were travelling. It was a successful and fast-growing business with a commercially strong market proposition.
The exit process started when I began to worry about what plans the big coffee chains may have in our sector. I worried about the effect this could have on our exit chances and the risk to our valuation. It was argued that potential acquirers will come from the contract catering sector who would value the Coffee Nation brand. I didn’t think so and felt a premium price would come from one of the big coffee chains who would simply acquire our machine network and put their own label on all our machines. I was right because that is exactly what happened.
Another worry I had, was once we had presented to the national chains what we did in the coffee retail market, the genie would be out of the bottle and there could be a rush to put together their own programme. If that happened and others followed suit, we could end up swamped with powerful competition and without a premium priced buyer as there were only a few national chains. I assessed the risks in conjunction with my investors and the management team and we decided to exit now. We had already had some talks with one national chain and ran an experiment where we put their label on our machines, but this had not triggered any recognition of the importance of our role in the market.
I agreed with my investors that I should write to the CEO of Costa Coffee to see if there was any interest in talks. The letter I put together went something like this: “Dear John, we are the leading supplier of Coffee on the Go and we have 900 sites in forecourts, motorway services and universities. We have over a million of your customers buying from us every month. Why don’t you come and see how we do it?” Within a few days the CEO of Costa Coffee came for a visit.
Costa’s CEO was welcomed by me and the CEO of Coffee Nation and taken into our new showroom. Our CEO had acquired Costa beans and had all our machines in the building continuously serving Costa coffee. The whole building was full of Costa aroma. It was an excellent bit of stage management by our CEO.
Our CEO and I worked together on the initial and subsequent presentations. It is difficult to describe the amount of care and attention that had gone into presenting our story. Each time we met with the Costa Coffee board or Whitbread board we updated our presentations with what we had achieved since our last meeting. The achievements described were significant. They were a great story in their own right. It showed a dynamic and capable management team driving a very commercially attractive concept.
The concept of Coffee on the Go was now out of the bag, so a successful conclusion was critical. But so was achieving that all important premium price. To do that we had to have some competitive tension with another national chain and we carefully stage managed those talks too.
Eventually we went into exclusivity with Costa Coffee and Whitbread plc and the deal was done. We achieved our premium price and excellent returns for our private-equity investor. The company is now under the label of Costa Express and has since gone on to become a giant, under the continued excellent leadership of the Coffee Nation CEO.
Here are some valuable links about mergers and acquisitions and achieving successful exits:
Education about M&A
https://www.london.edu/executive-education/strategy/mergers-and-acquisitions#Good-for-you
Europe’s top 25 mid-market financial M&A advisors and firms
https://www.consultancy.eu/news/3072/europes-top-25-mid-market-financial-ma-advisors-and-firms
Axial’s lower middle market M&A directory includes information on 43 Britain (UK) M&A Advisory Firms.
https://www.axial.net/forum/companies/britain-uk-m-a-advisory-firms/1/
Investec offer M&A advice to listed companies, privately owned companies and private equity backed companies. I have worked with Investec who are a first class firm to work with.
https://www.investec.com/en_gb/business/public-companies/investment-banking-and-equities/mergers-and-acquisitions.html
M&A Advisor and more. I have worked with Grant Thornton and they are a very good firm.
https://www.grantthornton.co.uk/services/deals/corporate-finance/selling-a-business/
Deloitte are an excellent firm for M&A.
https://www.deloitte.com/global/en/services/financial-advisory/services/mergers-acquisitions.html?icid=top_mergers-and-acquisitions
Arrowpoint Advisory are an experienced mergers and acquisition advisor.
https://www.arrowpointadvisory.com/?gclid=EAIaIQobChMIlKq4tZvo_AIVlsvtCh1qJwJdEAAYBCAAEgJOBfD_BwE
Bishopsgate Corporate Finance have completed over 200 deals at a combined value of £1.5 billion since they opened their doors in 1996, a third of which have been private equity led with over 30 deals completed for 3i plc.
https://www.bishopsgatecf.co.uk/
Top Corporate Finance/ Mergers and acquisitions lawyers in the UK. I have worked with the following firms in M&A, Investment or refinancing:
https://www.addleshawgoddard.com/en/” rel=”noopener” target=”_blank”>Aaddleshawgoddard.com- About exits
https://www.bakermckenzie.com/en/locations/emea/united-kingdom/london
https://www.cliffordchance.com/people_and_places/offices/london.html
https://www.eversheds-sutherland.com/global/en/where/europe/uk/index.page?
(I have worked with Eversheds Sutherland in my role as Chairman of a multi academy trust)
https://www.osborneclarke.com/locations/uk/london
https://www.taylorwessing.com/en/global-reach/countries/united-kingdom
Michael Tait is an experienced non executive director and non executive chairman with 23 years private-equity experience. He has experience of numerous successful exits, refinancings and mergers and acquisitions.
THE ALL IMPORTANT SALE PROSPECTUS TO SUPPORT A SUCCESSFUL EXIT