ACHIEVING SUCCESSFUL EXITS FOR SHAREHOLDERS
Achieving successful exits for shareholders:
The primary goal for the directors of a private-equity or venture capital backed company is to achieve successful exits and return a profit to their shareholders. The Chairman is in the driving seat of this mission. 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.
On most occasions when selling a company you will be dealing with very smart buyers. 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. They will be adept at understanding your business and market, valuing the business, assessing likely success and the possible risks. For people who don’t actually run a business they are exceptionally clever.
If you are selling out to a sizeable trade buyer there will often be several parts of their organisation involved in the possible acquisition. There will be the operating division or subsidiary who has the strategic interest in what you do and there will also be the acquisition team comprising Corporate Finance and Legal functions.
There could be further interested parties such as Human Resources. Managing the complexities between these functions and the politics involved in the acquirer can be complicated and sometimes very tricky. Each have to be believers all through the process. If any of them drop by the wayside, 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 keep the whole process on track.
In my experience it serves well to clearly define the roles of the directors and your private-equity team in the exit process. The chairman should be the lead orchestrator on the whole process. Normally the private-equity investor will lead on the selection of a corporate finance advisor, the compilation of a sales prospectus and on the process of identifying target acquirers. The management team, in addition to running the business, will drive the strategic presentations and meetings.
Compiling a good Sale Prospectus is the starting point. This 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 your market. It is important to identify and engage first with those that are likely to offer a premium price. In the case of Coffee Nation, I knew this would be the big brand coffee companies rather than other potentials such as the big contract catering companies.
My job as chairman in conjunction with the CEO and our co-directors, was to evangelise the company’s story and its potential to strategically and financially enhance an acquirers business.
Claims Management Group (CMGL)
The story of Claims Management Group (CMGL) is an interesting example of how my investors and I secured a successful exit for management and private equity investors alike.
At CMGL, I was an Executive Chairman brought in to deal quickly with a performance issue where the company was sliding into an increasingly loss making situation and where our closest strategic customer was defecting 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 want 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 and then went on to focus on our different areas of expertise.
My 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, pipe-line and future potential was 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.” This served to show that 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 them on track.
Coffee Nation/Costa Express
My second example is Coffee Nation and our very successful exit to Costa Coffee and Whitbread. It was my investor from CMGL working closely again with me as a team to exit Coffee Nation. The story behind the building of Coffee Nation to over 900 sites is already mentioned elsewhere on this site. In this article I am concentrating on the exit process and highlighting the main principles behind a successful exit.
The Gourmet Coffee to Go market was dominated by Coffee Nation who had had a clear run servicing the demand for quality gourmet 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 effect on 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 network and put their own label on all the 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 Gourmet Coffee On the Go market, the genie would be out of the bottle and there could be a rush to put together their own machine network. 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 particular 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 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 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 out of the bag now 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 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 in its own right under the continued excellent leadership of the Coffee Nation CEO.
- 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 to put together a quality Sale Prospectus.
- Focus your attention first on the key market players that can deliver a premium price for the business.
- Always create some market tension to keep parties keen and the price up. Look to secure exclusivity as soon as possible.
- Get to understand the motivations of potential acquirers, their structure and all the key decision makers, before getting into detailed meetings and presentations. Tailor the presentations and reports to suit the situation.
- The chairman should stay in 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 the shifting attitudes or positions of the acquiring teams.
- The chairman needs to keep the CEO and management team primarily focussed on running the business while still having the team involved in acquisition discussions and presentations. Any drop in trading performance will certainly have an effect on 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.
- Make sure all meetings are in a professional office environment. Don’t attempt to handle things over lunch. Lunch or dinner are ok after the deal is signed.
Here are some valuable links about mergers and acquisitions and achieving successful exits:
Education about M&A
Europe’s top 25 mid-market financial M&A advisors and firms
Axial’s lower middle market M&A directory includes information on 43 Britain (UK) M&A Advisory Firms.
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.
M&A Advisor and more. I have worked with Grant Thornton and they are a very good firm.
Deloitte are an excellent firm for M&A.
Arrowpoint Advisory are an experienced mergers and acquisition advisor.
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.
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
(I have worked with Eversheds Sutherland in my role as Chairman of a multi academy trust)
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