ACHIEVING SUCCESSFUL EXITS
The primary goal for the directors of a private equity backed company is to return a profit to their shareholders, and the CEO and the Chairman are at the steering wheel of this mission. Building the company so that it has significantly increased in value is the first challenge but managing well the exit process where investors realise their return is equally important.
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 valuing businesses and assessing likely success and the possible risks. For people who don’t actually run a business they are exceptionally clever people and know how to structure deals in their favour.
If selling out to a sizeable trade buyer there will often be several parts of their organisation involved. There is the operating division or subsidiary who have the strategic interest in what you do and the acquisition team comprising corporate finance and legal functions. There could be further interested parties such as Human Resources. Managing the complexities between these disciplines and their politics surrounding an acquisition can be complicated and sometimes very tricky. Each have to be believers all through the process. If any of them drop by the wayside in this regard, the whole deal can fail.
In my experience it serves well to clearly define the roles of the directors and your private equity team in the exit process. An effective chairman should be the leader in agreeing this definition and on keeping everything on track. A general rule for me as chairman, is to shortlist potential acquirers for strategic fit and identify how this would support the expectation of a premium price. My job from that point in conjunction with the CEO and his directors is to evangelise the company’s story and its potential to strategically and financially enhance an acquirers business. The role of the private equity investor team is to agree the final sale prospectus, the due diligence process, the value of the business and then to liaise throughout on matters relating to finance and working capital. All supported by the finance director.
The story of Claims Management Group (CMGL) is an interesting example of how my investors and I secured an excellent exit for management and private equity investors alike. My first association with CMGL was as 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 out of 650 and we were able to secure a turnaround of our defecting customer. Within 3 months the company was back to making money.
I picked up from market sources that Capita Plc were in negotiation with one of our main competitors and I discussed this with my investor. I felt we should see if we could knock out that deal by having Capita want to acquire CMGL instead. We made enquiries and soon got the attention of the operating division of Capita that would be strategically interested in us. The 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 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 acquisition 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. 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 the divisional directors in their presentations.
The richness of the presentations paid dividends. After the acquisition was complete the Capita divisional CEO said to me that “it was the CMGL divisional presentations and business plans that did it for them.” This served to show that when handling an exit, you must make it your mission understand the strategic and political pulse points of a potential acquirer and make extraordinary efforts to articulate what you have.
My second example is Coffee Nation and our very successful exit to Costa and Whitbread. It was my investor from CMGL again working closely together 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 blog 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 and the effect this could have on our exit chances and effect on valuation. It was argued that potential acquirers 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.
Another worry I had, was once we had presented what we do in Gourmet Coffee On the Go to the national chains, the genie would be out of the bottle and there could be a stampede to put together their own machine network. If this happened and others followed suit, we could end up without a premium priced buyer as there were only a few national chains. I assessed, in conjunction with my investors and the management team, that we ought to exit now and that we had only one shot at it. We had already had some talks with a 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 what we did in the market.
I agreed with my investors that I should write to the CEO of Costa 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 the 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 me had 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 of what we had achieved since our last meeting. The achievements described were significant and was a great story in their own right. It showed a dynamic and capable management team driving a very commercially attractive concept.
The concept 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 a very good price and excellent returns for our private equity investor. The company now under the label of Costa Express has since gone on to become a giant in it’s own right under the continued excellent leadership of the Coffee Nation CEO.
Michael Tait is an experienced non executive director and non executive chairman with 23 years private equity experience.