Paul Morris: Demystifying Private Equity – An Insider’s View

Paul Morris: Demystifying Private Equity – An Insider’s View

PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’S VIEW

DEMYSTIFYING THE COMPLEX WORLDOF PRIVATE EQUITY

INTRODUCTION

PAUL MORRIS

HEAD OF GROWTH ADVISORY BDO UK

DUNCAN GREGSON

FORMER CEO

AIR ENERGI

FERNANDO KÜFER

CEO

DISGUISE TECHNOLOGI ES

CONTENTS

SHOULD I STAY OR SHOULD I GO?

01

PE; ONE SIZE FITS ALL OR ENDLESS POSSIBILITIES ARE YOU READY FOR PE INVESTMENT?

02

03

FIVE COMMON MISTAKES TO AVOIDWHEN PITCHING TO PE FIVE TOP TIPS TO HELP YOU JUDGE POTENTIAL PE INVESTORS

04

05

BOARD MEETINGS – FIVE SIMPLE WAYS TO MAKE BOARD MEETINGS GENUINELY USEFUL FIVE WAYS INVESTING IN YOUR FINANCE DIRECTOR WILL HELP CREATE VALUE MEETING YOUR PE INVESTORS’ EXPECTATIONS OF FINANCE OPERATIONS

06

07

08

YOUR NEXT DEAL; FIVE WAYS TO PREPARE FROM DAY 1

09

GLOSSARY

10

4 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW

SHOULD I STAY OR SHOULD I GO ?

It’s often said of entrepreneurs and owner-managers that they spend too much time in the business and not enough time on the business. It’s the nature of the role that you tend to focus flat out on the work at hand, head down, dealing with immediate needs and priorities. There simply isn’t much time or space to look beyond the next 12 months. This has never been more true with so many businesses and business owners struggling to deal with the impact of the COVID-19 pandemic. But every so often, you have a moment where you look yourself hard in the mirror and think: ‘I’ve had enough’. Is it a passing thought or an indication of something more serious? It can be hard to tell the difference because running a business is a lonely role and you don’t always have external input. This can be even more acute when you operate in a fast and ever-changing market landscape. To help you sort out your thinking, it can be useful to focus on each of the factors involved so you can make an informed decision about what to do next. What are the typical triggers that could make you think about stopping? What are the indicators, external or internal, that could help you understand if it’s really time to consider an exit? And if you do decide it’s time to change, what are your options? Is it really a black-and-white choice, or is there a middle way between the two extremes of staying and going?

TYPICAL TRIGGERS I have spent more than 15 years talking to owner-managers about their options and investing in businesses looking to upscale. There are some triggers that recur frequently, sometimes in combination. These include: Age. You reach a milestone birthday – it used to be 50 or 60, but these days it’s just as likely to be 40 – and start to wonder how much longer you want to continue. Is it time to retire or do something else? Health. The rigours of running a business – wearing all those different hats, bearing all that responsibility – can take their toll, especially if you have to deal with any health issues Family circumstances. A family issue is another obvious trigger to give the owner- manager pause. Sadly, divorce is quite common and may require the release some of the business’ value to fund a settlement. You may have seen the business as a way of providing for children and they may benefit from a sale. What’s it all worth? Another trigger for an existential moment is when the entrepreneur realises that they are, in fact, wealthy but don’t have much to show for it. Their wealth is all tied up in their business. This can trigger an urge to diversify your wealth so you have more to show for all your hard work. A potential investor or buyer. Both buyers and investors are constantly seeking opportunities for successful investment in growth businesses. As a result, you may receive an unexpected and unsolicited approach from a PE house or trade investor. The figures could seem simply too good to turn down even if you weren’t planning to sell. Time for a change. Whether it’s getting involved in a charity, a creative endeavour or another business venture, you may simply have reached a point where you want to do something different. It may just feel like the right time to do something you’ve always wanted to do but had to put on hold because of the business. Appetite for risk (or lack of it). The business may have reached a point where it needs significant reinvestment or re-engineering in order to keep growing. How are you going to generate the cash to fund new systems, new premises, and increased staff? Coupled with your personal triggers, you also need to weigh the rational, factual indicators which could argue for or against an exit. These can be divided into external and internal indicators.

5 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW

EXTERNAL INDICATORS When your business began, chances are you seized a gap in the market and capitalised on it. You did something better or differently to everyone else. Having to constantly evolve the product, in order to just stand still, can be very challenging. But unless this is done, the competition can catch up and your advantage erodes. Where once you were an innovative force, you may now be in danger of being disrupted yourself. The challenges of evolving product and business offering can be daunting. Disruptive newcomers may threaten not just existing business models but also your revenue and point of difference. To compete, you may need to bring in whole new skillsets and systems, and re-educate prospects. Do you have the appetite and the capabilities to take on this new fight? The COVID-19 pandemic has resulted in increased pressure on businesses. In many instances owners need to evolve and adapt current business processes or product offerings, not to grow but just to survive. INTERNAL INDICATORS You also need to look at potential internal issues too. If the business needs to evolve significantly, for example, do you have the systems, processes and people in place to manage that transition? Can the business find the cash and the expertise to facilitate such an overhaul? For your business to grow, you need a management team in place with the competencies and experience to perform against aggressive targets. In many owner- managed businesses, the team isn’t really an executive C-level team but more likely a group of general managers who are more execution-focused than strategic. Are you ready to bear the opportunity and time costs and the possible personnel issues of a more strategic recruitment policy that will help create a more scalable business?

WEIGHING UP THE OPTIONS

All of these triggers and indicators need to be considered, together with your own personal feelings and wishes. If your business needs a significant overhaul, are you energised by the prospect of a new challenge or do you feel weary and worn down by the idea? Either way, what are your options?

JUMP

STAY

If your business is in need of significant investment and/or re- engineering in order to deliver on its growth potential and you are falling out of love with it, this may point to an exit. The obvious routes here are to sell to a trade investor or to a PE house. A trade investor or buyer won’t necessarily have a problem with a team of general managers. They’re likely to be buying for defensive reasons with a view to folding it into their own operations rather than selling it on again at a significant profit. For example, a larger trade buyer might be building a portfolio of products. A PE buyer, on the other hand, will need to see evidence of a senior and successful management team as well as a credible growth story.

Staying means that you can find a way to fund the growth that the business needs, either internally or by taking on debt. You probably also have the makings of a management team able to help you evolve. It may be that you can engineer a change in ownership structure, perhaps by transferring key responsibilities to a board member and staying on in a different role, such as a non-exec. This assumes, however, that there isn’t a need for wholesale investment.

PE MONEY-OUT DEALS – THE BEST OF BOTHWORLDS? A third option is to do a “money-out” transaction with a PE firm; a kind of managed transition. Typically, the PE firms offers to buy a significant minority stake (30-40%) and keeps you involved in a senior position. The PE firm will sit on the board and build a succession team by hiring an FD, CEO or Head of HR as required. Ideally, you get to focus on the elements of the business you’re best at, such as strategy, selling or product development. You will get an initial lump sum, allowing up-front diversification of wealth, as well as a significant extra pay out when the PE investor successfully sells the business on. By that time, the business should be fully scalable, with a stronger management team and a credible growth story in place. If you have reached a point of existential doubt, the benefits of the type of arrangement are obvious. You get some money up front, plus a trusted partner and adviser to help you take your business past its current challenges and up to the next level. You retain a majority stake in the business, succession is addressed as your role is gradually migrated out. If the outcome is a successful sale there’s more money to come. PE can provide a middle way for all those owners who, for any number of reasons, have started to think; ‘The only thing I can do here is sell’.

6 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW

PE; ONE SIZE FITS ALL OR ENDLESS POSSIBILITIES

There is a misconception amongst many business owners that PE is one size fits all. The belief is that PE investors are only interested in investing in big businesses and then only when they can take a majority stake. Management and owners therefore discount PE as a viable option when thinking about funding and future plans.

The truth is that PE investors come in all shapes and sizes. They have the firepower and appetite to do all kinds of deals with all kinds of potential portfolio companies. They also have unique personalities and approaches to working with businesses to achieve their goals.

7 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW

PE INVESTMENT SEGMENTS

PE SPECIALISTS

PE; A COMPLEX LANDSCAPEWITH ENDLESS OPPORTUNITY

Owners and management teams might find it helpful to think of the investment market segments as falling into following broad categories: Start up – where venture

The investment landscape has further variability as even within each of the above broad categories investors have different approaches. Here are a few examples: X There are sector specialists who focus on areas such as technology or healthcare X Some investors insist on having

So as you can see the investor landscape is complex and varied. This may seem daunting if it is the first time you engage with PE. You should also recognise this as a positive. There will be an investor for virtually any type of situation; every size of company, in every sector and for any type of deal. My advice to any business owner looking for PE investment is to be clear what type of deal and investor you are looking for. Appointing the right advisor will be critical in helping you find the right investor and then negotiating the right deal.

funds look to back a concept or idea. Often businesses are pre profit and sometimes even pre revenue! Funds are typically used to develop a product and build business infrastructure such as opening an office and recruiting some staff. Scale up – where venture capital or smaller PE funds invest in smaller businesses who need capital and expertise to grow further. The funds are typically used to build more substantial business infrastructure such as grow the sales team and develop international markets. Buy out – where PE funds invest in larger more mature businesses. The investment will help facilitate a change of ownership such as a management buy out. This allows the existing management team, who perhaps have no or little equity ownership, to buy the business alongside a PE house.

majority control whereas others are prepared to take a minority stake

X A broad spectrum from those

who adopt a passive approach when managing the investment, to the extent of not even taking a board seat, to those who are interventionist, these investors often have operational rather than financial backgrounds.

X Some investors have exit

timeframes of typically 3-5 years whereas others are happy to have longer term holds.

8 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW

ARE YOU READY FOR PE INVESTMENT?

When a PE deal process fails it is very frustrating for both management and the prospective investor. In most cases, both parties have expended significant amounts of time and effort. There are many and varied reasons why a deal can fall through, but one that is consistently cited by investors is that a business was not “ready” for investment.

So what does being “investor ready” actually mean? How can you make your business investor ready? You need to ask yourself a series of simple questions and your honest answers will tell you how investor ready you are.

9 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW

IS YOUR MANAGEMENT TEAM STRONG? Your management team must have depth and breadth. An investor will be nervous if a business is dominated by or is too reliant on one individual who clearly directs and controls other members of the senior team. A business must have a leader but others must contribute and be effective across the main functional areas such as operations, sales and finance. The COVID-19 Pandemic has resulted in another angle of questioning from investors. Investors will want to understand how the management team has dealt with the disruption which has impacted many markets. It will not reflect well on the team if the strategy is one of “more of the same” in the hope of coming out the other side. Investors will react well to the team taking the opportunity to reset strategy to adopt to the changes that will inevitably result. A good example of this is accelerating the adoption of technology to improve internal efficiency and/or enhance the customer experience. However, a PE investor will not be put off by the need to fill some gaps in the management team. A PE House will often be able to add value by attracting the right quality executives to the business. ARE YOU CLEAR ON YOUR KEY STRATEGIC PRIORITIES? Your strategic priorities must have a material impact on the growth of your business and therefore value such geographic expansion, product extension or making acquisitions. They cannot be a tactical “to-do list”. It is always worth remembering that too many strategic priorities can almost be as bad as too few or none at all! It will be enormously attractive to an investor that you have thought through and agreed a list of meaningful strategic priorities ahead of any investment. It will give the investor confidence that you are focused on growth and are ready for investment. DO YOU HAVE QUALITY >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24

Made with FlippingBook - Online magazine maker