For senior business people, one piece of work that sits outside of the day-to-day commercial disciplines is the valuing, buying or selling of a business. Whether it’s an owner-manager pondering an exit or a management team looking at what might be involved to see through a possible buyout, some well-informed mentoring and support is essential. Christian Annesley looks into the art of the deal – and at why and when to reach out for expert help.
How do you crystallise value in a business? There are lots of elements to explore in the question, and context is everything.
But dealmaking can still be pinned down in broad terms since nearly all businesses that change hands with a sale do so in just a handful of situations.
Common ways businesses are sold
Let’s run through the most common scenarios.
- Some are bought by the existing management, in a management buyout, or MBO. Here, the deal is sometimes self-financed by the management, but more commonly might have some bank debt in the mix or else be backed by a private equity house
- Some are bought by another business – what’s called a trade sale
- Some are acquired by a private equity house, sometimes with a management buy-in on the agenda – parachuting in a new management team – but more commonly as part of an MBO (in which case, see above)
Mentoring the new management
For a management team that’s new to buyouts – and that’s most of them – working towards a deal is a big learning curve.
Rob Harrhy is managing director of Jubb Consulting Engineers, a multi-disciplinary engineering design consultancy with a 50-year back story. In 2016, he led the management team that acquired the business from its owner (the purchase was backed by bank debt from HSBC) – and he says mentoring was crucial.
“When we started on this journey, as a management team, we opened up discussions with some corporate finance advisers as we got under way.
“At that point, you see the fees involved and it is hard not to gulp and to wonder if there is another way. But the value of having advisers on your side throughout the whole process is soon clear.”
Like many management buyouts, there was a lot going on beneath the surface to bring things together at Jubb, says Harrhy.
“There are so many layers to a business and its functioning. Everything has to align for an owner to get the right deal and for the new management to pick up the reins with the right finances and structures in place,” he says.
He coached us through the bank pitches and how they would run, for example. He worked through the messages we needed to fine-tune and how to present them.
In the case of Jubb, Harrhy says the first challenge was to get the business in the right shape to be sold and then to work through the finer points of the deal itself.
“As a business, we had to get to the point where the management team weren’t reliant on the departing owner: we had the complementary skills between us to carry the business. The finance director has ten years in the business and some others in the management had 15 years-plus. Added to this, as a business we have a diverse client base with no over-reliance on particular customers. There is repeatability in what we do and, healthy financials and cash in the bank.”
To get to this position, Harrhy says Charles Davey of the accountancy firm Bishop Fleming was a crucial mentor to fall back on.
“He’s a corporate banker by background, and he helped us to work through so many variables, and especially as we needed bank debt to fund it all.”
Davey helped the management with establishing the structures the business would need post-deal, and he told everyone what to expect when it came to securing funding too.
“He coached us through the bank pitches and how they would run, for example,” says Harrhy. “He worked through the messages we needed to fine-tune and how to present them. We had a good team but we were nervous about the risks and the costs, so we had to get things right.”
The non-exec as a deal mentor
Another mentor in the mix for Harrhy was a non-executive at Jubb who helped to bring together the new management in the first place.
“He’s someone I had worked for previously and he was invaluable in instilling confidence in the new management team as it came together. He was also great at keeping me focused as the deal approached – and ensuring I wasn’t distracted by non-essentials but staying focused on what mattered.”
The non-exec moved on from the business after the buyout was completed, but Harrhy said the experience changed his sense of what value a non-exec can add.
“When you feel a bit swamped by everything that is going on you need these voices or sanity and experience who can keep you on track.”
Mentoring from professional services
An MD who is exiting a business for the first time also needs some support and mentoring through what is often a challenging, protracted process.
Dycem, a manufacturer of clean room equipment, was bought by private equity house SEA Equity in January 2016. The outgoing MD was Mark Dalziel, who has this to say about the process.
“I wanted to retire, but there was no-one obvious to take over. It was a weakness in terms of a sale and we needed a solution.
“Getting the business ready for sale took time and effort. I found it invaluable to have advisory help and mentoring at every step from Grant Thornton. All the paperwork and contracts needed to be on a better footing, which was a bigger piece of work than I expected, but it was the management challenge that soon became the real focus.”
A sale was made harder because Dycem has two halves to it. When trade buyers took a look at the business, many liked one part of the business but not the other.
“That shrank our pool of possible buyers and conversations,” admits Dalziel.
“Private equity had not been in my mind as a buyer. I guess I was a bit prejudiced. But then SEA Equity turned up and they were able to see the opportunity in the round where others couldn’t.”
Dalziel ended up working with SEA to find an experienced MD.
“It was a big step but the right one. SEA was also happy to take its time and get things right. The whole process really challenged my preconceptions about private equity. Once you commit to something like that, there’s a bond that’s forged between buyer and seller even before the deal gets done. It changes the dynamic.
“You might say we weakened our position as a seller. But there were upsides for everyone – that was the point. Where the trade buyers that looked at the business weren’t terribly keen, SEA saw the value we’d created across the board and in the end that translates into a better sale price. I needed someone to be there alongside me through that process, and that’s what SEA’s people did.”
Ultimately it all went swimmingly for Dalziel.
“We found the talent we needed at the top of the business and now I’m edging out. It was a great process – just how you want a deal to get done.”
Mentoring from the other side of the deal?
To close, here’s one more story that shows up the unexpected places from which mentors and support can sometimes come.
Martin Whitfield is today the proud managing director and co-owner of ACIEM, a specialist mechanical, electrical and civil engineering business that operates in the waste water industry and other sectors.
In 2016, the business went through a management buyout after the owners of the company, a Canadian corporate called Finning, looked at the best options for divesting the Bath-based operation.
Here’s Whitfield: “It was a challenging journey for the management, not least because breaking away from the parent company meant we had to change all our systems and it altered the financials of the business too.
“Where before we were supported by a corporate machine, with IT, payroll, HR and all the other infrastructure you’d expect, to separate we needed to move to independent platforms for every function.”
Just the sheer volume of challenges and tasks to get through ahead of the deal was potentially overwhelming, says Whitfield.
So where did help come from through the process?
“Funnily enough, Finning had appointed the business consultancy KPMG to support the process on their side, but their advisers supported us too. It was invaluable as we were living off our wits at times.”
With the potential that the management team would take its eye off the ball with regard to the business as the process unfolded, Whitfield said having the right support meant that didn’t happen.
“The company had been shrinking as part of Finning, but with the deal now done we are able to capitalise on opportunities with more agility.”
What kind of opportunities?
“We have just opened a new office in Port Talbot to be closer to potential projects and partners, and other new openings will follow,” says Whitfield.
“Turnover was £6m in the final year of trading as part of Finning, but we are aiming to do £14m of business this year, as a management-owned operation. That’s how big ACIEM was in the past and now we can push on and even grow beyond that. Nuclear is one new opportunity we are exploring, as well, with Hinkley Point and other nuclear projects coming down the line.”
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