How to Exit as a PE CEO

The key to planning a successful exit is to focus on the potential buyer, says Adam Hodges, former CEO of gaming company Playnation. He advises: “Work backwards. Ask who’s going to buy the business. What do they want it to look like? What would make it interesting to them?”

Adam should know. After conducting a private equity-backed management buy-out in 2013, he recently sold the business − which operates 20,000 amusement and entertainment machines over 1,700  UK sites − to Austrian gaming company Novomatic Group.

But like many PE-backed CEOs, during the two years before the sale, Adam had to rethink his exit strategy, draw up new plans and adapt as the circumstances for potential buyers changed.

It’s important to do your research. Assess whether a trade sale, secondary buyout or even an IPO are right for your business, but don’t be afraid to adapt if that alters.

Study the market 

Although the global IPO market cooled in 2015, exits via trade sales and secondaries remain strong. According to research by Big Four firm EY, PE houses have sold 625 companies via M&A this year, with an aggregate value of $262 billion (£174 billion), which is roughly in line with last year. Strategic M&A has been particularly active, accounting for 72 per cent of PE sales, the highest proportion in more than a decade.

Charlie Johnstone, Partner at PE firm ECI, notes: “There’s a lot of money globally and that’s feeding into higher prices across all sectors, from houses through to companies.” Unsurprisingly, he says the tech sector continues to attract the highest multiples and that the three tech businesses ECI sold in the last 18 months − CarTrawler, Fourth and Wireless Logic – each attracted a premium pricing of 17 to 20x their profit.

As ever, buyers want to see the magic combination of predictable income and scale. Ewa Bielecka Rigby, Investment Director at LDC, says: “Management needs to understand the size of their addressable market and where future growth will come from. A track record of sales and profit will be vital for potential buyers, together with predictable, high-recurring revenue and a forward pipeline of earnings, preferably backed by long-term contracts.”

Tell your growth story

When Roger Taylor took the CEO role at PE-backed Quadriga Worldwide in 2011, it was two years into the Great Recession, annual new contract signings had fallen from €120 million (£85 million) to €30 million (£21 million), and the business, which provides technology to hotels, had no product roadmap.

“We realised we had to come up with the growth story because my top line was falling away and the rationale for the product and business was dying,” Roger explains.

It was also his first operational role after a career in M&A advisory and PE investment. He recommends the first point in any exit strategy is to understand the reality of the business. In the case of Quadriga, this meant determining the company’s mission so that it could be easily communicated to staff, customers and potential buyers.

“If I were going into another situation, that would be the first thing I’d look to create. It’s the anchor by which you can align your vision with the board,” says Roger, who left when the company was sold earlier this year to software development and professional services organisation Exceptional Innovation.

Ewa agrees with his advice, adding: “In an exit situation, the same story delivered in a consistent way by different management team members builds trust with potential buyers, especially when backed by facts and a good track record for the delivery of results.”

Right-size the business

Adam had to go back to square one when he was told his initial exit route for Playnation was no longer viable. After assessing various options, he chose to make the strategic acquisition of FunHouse Leisure as it allowed the company to move into a new sector.

“We doubled the size of that business in 12 months,” he says, adding that it wasn’t just a cash grab. “It was about exposure into that market space, which meant that it was more scalable for an acquirer.”

Grand exit strategies won’t count for much if business performance drops. In such instances, raw pragmatism is required to get the company back on track.

This is something Criticaleye Board Mentor John Allbrook has experienced first-hand. Until recently, he was the Executive Chairman of Syscap, a PE-backed specialty finance company. After joining in 2010, John undertook a significant turnaround as revenue had fallen from around £160 million to £60 million per annum.

“We identified one market where we really felt there was an opportunity and that was providing bespoke lending facilities to smaller legal partnerships,” he explains. “This initiative proved hugely successful and was instrumental in our recovery plan as revenues once more climbed north of £150 million.

“Our situation was too challenged to say: ‘We won’t chase that opportunity because it doesn’t fit with the exit strategy.’ We needed to cut cost, redefine the growth strategy and quickly become cash-flow positive. But once the strategy started to work it became extremely clear who the buyers were likely to be, because they were the companies we were competing against.”

Build your team

Investing in the right employees and a strong succession plan can only benefit the business. “Don’t underestimate the value your staff holds,” says James Boot, Senior Relationship Manager at Criticaleye. “High employee retention rates, clear and functioning incentive plans and a positive workforce can be very attractive to the right buyer, perhaps to the extent of an extra multiple.”

A good team will mean the CEO can delegate operational responsibility as they devote more time to the exit strategy and deal itself.
Ewa recommends: “Plan for senior executives to be totally absorbed by the process, therefore the operational team needs to focus on keeping the results going, which is vital to good exit metrics.”

This is precisely what John did for the exit he led at Syscap. “The sale process was handled predominantly by myself and the CFO. Other members of the management team focused on the day-to-day running of the business. Of course we had to bring them into management presentations to prospective buyers and parts of the diligence process, but we kept it tightly managed to minimise distraction,” he explains.

Agree the equity spread  

Suspicion and sniping within the senior management team about the equity spread is in nobody’s interest.

As James notes: “Being clear to potential buyers about the management’s equity expectations is key. Therefore when writing the investment memorandum put the current equity spread, and who is set to make what type of return from the exit, on the first page.”

Similarly, it’s essential that when a management team originally takes on PE investment, they fully understand the terms of the transaction so they can remain incentivised. ECI’s Charlie warns: “If you’re going in with a high valuation it’s harder to generate returns and the management team, as the deliverer of that shareholder value, is under more pressure. But I’d say the biggest risk is taking on excess debt commensurate with the high price.

“If you can, steer the deal towards someone who is willing to pay the right price but still willing to put in less debt and be more collaborative with the team. There are some parties that will put their loan notes to rank ahead of management, put exit fees in and do all sorts of things that will be very detrimental to management teams.”

It’s one of the reasons why a CEO should take care when deciding which PE house to bring in. Adam spoke to about 15 PE houses before agreeing a sponsor for his MBO − it wasn’t the highest bid, but it was the best fit. He explains: “What was most important was that they [the sponsor allowed] me to get on and run the business myself; they wouldn’t micromanage me”.

By Mary-Anne Baldwin, Editor, Corporate

Do you have a view on this subject? If you have an opinion that you’d like to share, please email Mary-Anne at:

Hear more on PE at the next Private Equity Breakfast, where Nicola Pattimore HR Director at Equniti will share her experiences of the company’s recent IPO.




Planning for the Best Exit

Comm update_22 October2

The expected frenzy of private-equity deals in 2014 hasn’t quite come to pass. For CEOs with an eye on the exit, a secondary buy-out remains the likeliest route, with many opting to roll with a deal so they can keep building the business. While the opening up of the public markets is certainly another welcome option, trade buyers are continuing to show caution due to perceived overpricing.

Indeed, with the availability of debt back at levels seen in 2006 and 2007, valuations have been the sticking point for a number of transactions. “Pricing expectations are high,” says Stuart Coventry, Partner at corporate finance firm Jamieson. “Bids often come in below where the sale-side expectations were set, and those expectations have probably been built on the back of a very bubbly IPO market earlier in the year.”

To maximise the value of a sale, the CEO and management team need to stay focused on the fundamentals. Rob Crossland, Chief Executive of employment services company Optionis, which completed a secondary buy-out through MML Capital earlier this year, says that “in any kind of exit you need to demonstrate how the business has grown under your tenure but, equally, why there is more growth to come”.

The potential for scale is what drives value, often through global expansion. Simon Tilley, Managing Director at corporate finance firm DC Advisory, says: “[PE investors] are getting much more excited about opportunities where there’s either a UK business that operates overseas already, or there’s an opportunity to take it overseas and get more international exposure.”

Grant Berry, Managing Partner at private equity firm NorthEdge Capital LLP, comments: “Nobody wants to buy a business at the top of the market, so it’s important that when someone is coming in on the buy side they are confident about the business being able to grow in the medium to long term.”

Fit for the Future

From the outset, the management team should be assessing the market and deciding upon who the potential buyers might be. Catherine Wall, Non-executive Director at investment management firm Mobeus Income and Growth VCT, says: “What is the totally compelling story for their business? Does this acquisition give [a buyer] entry to innovative or fast growing markets, products or customers? Does it give them new skills or capabilities?”

Ian Edmondson, Chairman and Managing Director of Dunlop Aircraft Tyres, says: “Understanding the likely interest of different potential owners will help to define the exit. This needs to be done by exploring, networking and developing a range of relationships…

“In some cases there may be equally interested future owners from different backgrounds, meaning a possible secondary buy-out might be just as likely as a trade sale. If the current owner wants a complete 100 per cent exit at a point in time, then an IPO is not usually the favoured option.”

Douglas Quinn, Chairman of homecare provider Baywater Healthcare, comments: “You want to end up with a strategy that is very portable. Thinking through all the options and having a range of scenarios depending on the circumstances is very helpful.”

The chairman, usually appointed by the sponsor, certainly has a role to play here in ensuring there is alignment on the exit strategy. Ian Stuart, Chairman of four mid-market PE-backed companies, including manufacturing concern Aspen Pumps, says: “It’s about getting people around the table to talk together and be honest about what they want, and achieve a compromise.

“Specifically, if private equity wants to exit later and the management want to go earlier, you will generally arrive at some sort of incentive arrangement for management to stay longer.”

Of course, preferred exit routes won’t count for much unless the management can demonstrate strong performance, good governance and show there are no nasty surprises for buyers, such as big ticket customer contracts coming up for renewal, leasing issues or weak intellectual property. “You can’t dream those up at the last minute,” says Gerry Brown, Criticaleye Board Mentor and Chairman of logistics concern NFT.

The importance of succession cannot be underestimated. “We worked on the buy side of a deal that fell through over the summer, where the owner CEO wanted to exit but there was no work put into succession planning – it’s just awful when you see that happen,” says Simon. “It’s partly down to the value, because you won’t get the same price as if you’ve got a strong management team solution in place, but it also comes down to deliverability and, in this case, they couldn’t get the deal [finalised].”

It comes back to having a long-term approach so that the business is an attractive proposition. Tania Howarth, Chief Operating Officer of frozen food company Iglo, says: “Any PE-backed CEO has to balance exit considerations with the need to focus on building a strong, sustainable business…

“From the beginning, a CEO needs a strategy to build a better business and then understand where on that journey his or her current investor will exit, so that the business evolution can be tied into the investor goals.”

Every step must be taken to eradicate easily avoidable mistakes that either damage a valuation or scupper a deal. After all, the exit process will be demanding enough for a management team, without them having to address deep-rooted issues in the business at the last minute. Ian Stuart says: “Don’t get so distracted by the exit that the company goes haywire in the meantime. You’ll then almost certainly have a bad exit if results fall away.”

According to Rob, it’s important to keep having conversations around the exit. “Having done it twice now, [I know] you need to be discussing it sooner rather than later. It should definitely be on the strategic schedule for review at regular points as, if this isn’t the case, there’s the danger of becoming misaligned and unclear about the future.

“Private equity, I think, has a bit of a challenge, because initially they don’t want people talking about exit… They want them focused on the day job. If they let that continue, I think that can create some difficulties down the line.”

Timing has a part to play in any sale and that’s not necessarily something that can be controlled. Pardip Khroud, Investment Manager at private equity firm LDC, comments that political and economic uncertainty can suddenly have a significant impact on the behaviour of buyers. “It makes businesses far more difficult to value and deters potential buyers from committing,” she says.

The nightmares of private equity occur when communication breaks down between sponsor and management team, resulting in misguided assumptions. It largely falls on the CEO to ensure this doesn’t happen, so there is a healthy focus on performance – short and long term – which is what will matter the most when a potential buyer does come along.

As ever, a little luck always comes in handy too.

I hope to see you soon


5 Steps to the Perfect Exit

Comm update Face - 31 july

Two types of private equity-backed exit have occurred in recent times. The first entailed executives being ejected from a company with the explicit understanding that they ‘never darken these doors again’, while the other was of the more traditional variety involving a lucrative sale. Thankfully it’s the latter that is now the focus for many PE firms and their portfolio companies.

The notion of a ‘perfect exit’ is perhaps misleading. Each business will have its own challenges to overcome, as will PE firms given the lifecycle of their particular funds. Criticaleye spoke to a range of leaders within private equity to canvass their views on what needs to be done in order to get the odds in your favour when selling a business.

1) Management Must Take Charge

Time and again executives are too subservient to their PE backers when it comes to defining and driving an exit.

Andy Dunkley, CEO of jeans brand Lee Cooper, who completed a $72 million (£47 million) trade sale to US company Iconix earlier this year, advises: “In the current environment there are a number of private equity firms chasing only a few opportunities. Investment periods have been extended to the point where many PE houses are desperate to find an exit. The challenge for senior management is to take the initiative and outline a vision for the future. Ask yourself: ‘What’s the next stage?’”

Don’t leave anything to chance. Sam Ferguson, Chief Executive Officer of information management provider EDM Group, argues that some PE firms “get mixed up and think it’s their job to be running the business”, when what’s needed is a backer who can provide extra investment where necessary or support when looking to do acquisitions.

The expectations of management and the PE firm need to be set out from day one (the chairman has a huge role to play here) and, if you get that chemistry right, everything becomes a whole lot clearer. “It’s great to have money men that have got faith in your team and are prepared to back your ideas,” adds Sam.

2) Trade, Secondary or IPO?

When it comes to deciding on an exit, market reality will inevitably clash with wishful thinking but it’s essential to scope out the likeliest options.

Terry Stannard, Chairman of the PE-backed TSC Foods, comments: “Our preferred exit route would be trade because there may well be synergies [for a number of potential buyers] that represent value, but we are equally clear that the business has sufficient growth in it to be attractive to another PE house.

“Once we’ve decided we’ve built sufficient value in the business for existing shareholders, while also having enough growth left for future ones, then that will be the right time for us to exit.”

Andy says: “When I joined Lee Cooper in 2008 and looked at where I wanted to take the business, we came across an exit partner in Iconix, which was a licence only business. Although this was way too early in the process to think about selling the business, I suddenly realised it was a business model that could work for us and that it might be a viable exit route.”

Say it quietly, but the public markets are also an option. John Kelly, Chairman of Novus Leisure, says: “Some of the bigger companies are heading for IPOs and it is a healthier market than it has been. Just look at the equity values; the IPO market is there now. It’s going to be tricky and secondaries and trade are still areas where, if your business is shaped properly, they’re more immediate opportunities than an IPO, but at least it’s another option which didn’t exist a year-and-a-half-ago.”

Carl Harring, Managing Director of PE firm HIG Capital, agrees: “We’re in the sale process for one business which we thought was going to be a trade sale, but we were advised to consider an IPO; so we’ll probably do that now and run a dual track.”

3) Get Fit for Purpose

Lack of access to capital, unsustainable debts and radically changing markets, have seen a number of management teams and PE firms fighting to get businesses onto an even keel.

“It’s taken [the UK] a while to stabilise since 2008,” says Sam, whose business, EDM, recently acquired US-based competitor DIT. “We’ve still got the ongoing effects of that period in that funding is not as readily available for growth capital. It is there but looking at five times or six times multiples for earnings is no longer the norm; it’s now more like three times, even for companies that are doing well like ours.”

According to Carl, European businesses have been slower to deal with their cost bases and are facing the tricky task of trying to deliver sales within a leveraged structure. “It’s a case of needing to right-size the business, making sure that you’ve got the right management team in place as they’ll soon need to move from fire fighting to a strategy for growth,” he says. “It’s very important for board-level executives and non-executives to realise we’re in a very different environment right now and maybe we need some different skill-sets.”

4) Is the Business Built to Last?

The goal for any PE firm and management team should be to build an excellent company with bags of potential. Terry says: “In the early stages we invested in people and marketing to develop the branded side of the business, which will help with the value on exit. At the time it represented an extra cost… but there was an acceptance that this investment would make us more attractive to buyers and I think it was a far-sighted attitude by the PE firm.”

For Carl, whose firm, HIG, recently closed its second fund raising in excess of €800 million (£698 million), the numbers have to stack up for a business and it’s then a case of devising ways to ramp up sales. He explains: “Typically, what we do with all our investments is that we go in and [improve] financial reporting, which gives the management team clarity on what the business is doing. There is a big focus on cash and reinvesting it into profitable growth…

“We’re also good at making the sales force better in the way they are structured, incentivised and interact with customers. A lot goes into pricing and sales force efficiency, then applying resources where they should be able to drive growth.”

It can also be useful for a PE firm to open its little black book of contacts, especially for smaller companies. Paul Brennan, Chairman of OnApp, which provides cloud software for hosting providers, says: “My experience with good PE houses is that they are well-connected and probably have different portfolios of investments, which can be part of the overall value chain or ecosystem that you’re working in. Therefore, they can help you connect the dots between partnering and end customers; sometimes they can help with technology transfer too.

“So rather than providing money, the benefit of PE is really all about the access to markets and to connections, be that individuals or companies, that you probably wouldn’t have access to otherwise.”

5) Manage Your Talent

Succession is a serious issue. There simply must be people who can step up and take on the senior management roles after the exit, otherwise there can be ugly discussions about how long executives stay on and where the intrinsic value in the company lies.

This raises questions around incentivising the best employees and how to identify and nurture talent. “You set out to create a great company that will get stronger each year, so that if a trade buyer acquires you they are doing it because they are buying the assets you’ve built up in terms of people and ideas, and you know the company will be around long after you’ve exited,” says Sam.

Tania Howarth, Chief Operating Officer of frozen foods company Iglo, puts a different spin on succession and broadening skills: “PE firms are missing a huge opportunity because they have to take a risk on too many people too often, when they could be moving the talent around from within existing businesses.”

The timing of moving management around would need to be handled carefully, but there seems to be sense in transferring individuals to sharpen their overall leadership skills (like you would in any corporate). “What PE firms generally don’t seem to do is to look at the talent they’ve got across their portfolio,” adds Tania.


Sure, there are zombie private equity firms, snared by a business model that was created for an economic environment that no longer exists. They can’t raise new funds and they can’t sell portfolio companies – it’s a case of winding down operations, slowly.

But that’s not the whole story by any means. Good PE firms realised that the toppy valuations and over-leveraged markets of 2007 were abnormal and have since made the necessary adjustments. These firms are now raising funds and executing deals – as opposed to sitting on their hands, waiting for things to return to how they once were.

For management teams on the exit journey, as we’ll be discussing at our forthcoming Private Equity Retreat, it’s a case of having a vision, communicating with investors, generating some competitive tension in the marketplace and using advisors wisely.

All of this won’t count for much unless the business is performing well. If you’re looking for a fulsome exit, then hit your numbers and demonstrate the case for scale and future growth.

Simple, really.

I hope to see you soon.


Three Golden Rules for Aspiring NEDs


Those executives who have gone on to build solid portfolio careers for themselves consistently cite the need to network feverishly, a willingness to learn and the ability to master their own ego. These three pillars are essential for success, especially as the weight of expectation and the competition for roles have increased considerably in recent years.

Unfortunately, directors are often surprised to find they’re not inundated with offers for NED positions once they’ve called an end to their executive careers. They shouldn’t be. It’s just not that easy anymore, which is why those who have made the transition freely admit to working hard to gain that first role.

Here are some tips on how to go plural from those who have done it:

1) Raise Your Profile

You must put the time in to network. Shyness is no excuse. Neither is arrogance. You have to start planning ahead – 18 months to two years as a rule of thumb – and spread the word that you’re interested in a NED role and you really do have something to offer. Cheryl Black, Non-executive Director of Southern Water, says: “Start to actively build your network before you leave your executive role. You need to let your network know that you are seeking NED roles… Once you come out of your day job, as it were, it’s much more difficult to get that first NED role and the first one is all important.”

Alastair Lyons, Chairman of outsourcing company Serco, says: “The biggest challenge is to get your first appointment. There is no alternative to working hard at getting oneself known and seeking to keep one’s options as open as possible. Alongside this, the other big challenge is knowing whether or not to take something that is offered if it isn’t quite what one wants.”

For John Ormerod, Non-executive Director at ITV, there is a growing tendency for boards to appoint the people they know have the necessary experience, which certainly makes it tougher to land that first role. “This often means people will need to draw on their previous experience to be able to capture their first opportunity,” he says. “It helps therefore if you can build a big network of contacts because people who know you more easily recognise the skills and experience that you do have.”

Alan Giles, Chairman of clothing retailer Fat Face, makes a similar point. “It’s easier to be appointed as NED in a listed company if you have current or previous experience as an executive director in another listed company. Many employers will allow you to take on one NED role, so you are best placed to begin acquiring some NED experience while in a full-time executive role. Although do bear in mind that it is quite time consuming, particularly when you are first appointed and becoming familiar with an organisation’s activities.”

2) Keep Learning

Clearly, if you’re at the top of your game as an executive then you’re no fool, but that shouldn’t lead to complacency about what it takes to be an exemplary NED. John says: “The role has got a lot more demanding since I started more than a decade ago and therefore requires people to be more skilful and experienced. Even back then, one of the things I did do was look for a charity that had perhaps a less demanding environment compared to a public company, but that had people on the board who were very experienced with governance and how boards operate, so I was able to learn from them.”

Bob Beveridge, Non-executive Director at mobile communications concern InternetQ, says you can’t underestimate the importance of standing out from the crowd in terms of knowledge, skills and experience. “You need to develop up-to-date opinions on the key issues in the NED world, such as on diversity, governance, board evaluations, ethics and so on.”

Cheryl comments: “You mustn’t think that getting one of these roles is simply a rubber stamp and you just turn up at board meetings and drink tea. It genuinely isn’t like that in my experience… There’s much more active involvement in the business being asked of NEDs, getting to know the senior team and spending time in the business.

“Currently, I see a lot of people seeking regulatory experience from NEDs but it’s more than that as, in difficult times, boards are looking for NEDs to come up with different ways of approaching business problems, whether that’s seeking to grow internationally or diversifying into a different sector. The role of the non-exec is always to encourage the executive team to think more broadly.”

3) Know Your Place

An effective NED understands when to keep their counsel and when to challenge forcefully. It requires a degree of self-control that may not come naturally to those who have been used to making decisions and calling the shots for a number of years. Nevertheless, it’s a skill that needs to be learned.

Alastair says: “A high level of emotional intelligence is needed… A good NED is typically low ego: happy to contribute only when he or she has something worth saying, with experience relevant to the role and business and who is willing to work hard, both inside and outside the boardroom.”

According to Alan, the principal quality to be a successful NED is to balance being collegiate and supportive with constructive and rigorous challenge. “It’s not easy to get this balance right, but it becomes easier with confidence and experience, and with thorough preparation,” he says.

Iain Robinson, Managing Partner of consultancy AMG and former Chairman of business travel company Reed & Mackay, comments: “A NED has to be truly relevant to the board they are part of and recognised by others – not just those on the board – as adding value that couldn’t be provided by someone else. In addition to this, a NED also has to recognise that they aren’t just there to offer opinions on an ad-hoc basis, but to be able to see further ahead than those tasked with running the business and to come into discussions with prepared opinions.”

Lines can be blurred when a NED still hankers for an executive position. “For anyone making the transition from executive to plural, it’s important that you no longer want to be an executive,” insists Neville Davis, Chairman of software and IT services company Amor Group. “If you do, you will be frustrated and will not be very effective in your job. It’s not your duty to tell the execs what to do or to second guess them. Your job is to advise, support, challenge and stimulate them.

“It’s important that non-execs understand that they’re not just there as policemen – their primary function is to ensure the business is as successful as it can be, then their secondary responsibility is in ensuring governance is correct and inappropriate risks are not taken.”


In certain quarters, the expectations placed on NEDs have a negative connotation. That’s the wrong way of looking at it. The duty to the organisation and stakeholders should always be high – frankly, it’s a great time to take on a non-executive role as you can be a key influencer in aiding a business to reach its goals.

The competition for positions may be fierce but why should companies be looking for anything other than the very best candidates?

It’s a case of demonstrating you deserve your place on the board.

CEOs: How to Manage a Crisis

Today’s intense public scrutiny seems to unearth business calamities on a weekly basis, whether they’re leadership gaffes, tales of wrongdoing or a disastrous technical failure. When such a crisis hits and the media demands immediate answers, it’s up to the chief executive to get the details clear, control any panic and secure the long term reputation of the business.

Andrew Heath, President of Energy at engine-maker Rolls-Royce says: “Our approach is to stick to the facts: acknowledge them and work swiftly internally, to understand what we need to do before we tell people [outside the business]. The media doesn’t necessarily like it, but both [they and] our business circles do recognise that… we don’t speculate and only put out what we know when it is factual.”

Once the details and the extent of the risks to the business are ascertained, the clear up can begin. Leslie Van de Walle, a Criticaleye Associate and Chairman of both construction supplier SIG Plc and recruitment consultancy Robert Walters, says: “Be vigilant: you need to monitor the… feedback from your audience. Be ready to react relatively quickly, with a low profile and with the facts, hoping that it will calm down the bad press before the spotlight moves on to something else. [The key] is giving an appropriate response to the events, without under or overstating it.”

It’s a case of defining your priorities and the interests of key stakeholders first and foremost. Kevin Murray, Chairman of PR consultants Good Relations Group, says: “Trust is a strategic asset and if you destroy a relationship with a customer or a supplier it is far more damaging to your business than some bad media headlines. Ask whose relationship with you is being damaged [by the crisis] and what you need to say and do to fix it. It is about developing the right strategic response, rather than the right media response.”

Enough businesses have undergone high profile catastrophes to make it clear that successfully handling the external perception of a crisis hinges on the quality of internal management and with the aforementioned focus on a business’s relationships, values and reputation.

In mining, for example, the ongoing stability of a venture is threatened when companies don’t keep local communities onside. Bruce Cox, Managing Director of Rio Tinto Diamonds, says: “It is not just the global brand reputation that is critical, but the perceived or real community concerns. They can result in lasting local reputational damage that is hard to recover from. The solution there comes from facing issues head-on, through sincere and genuine engagement with community leaders.”

The company line

When a crisis breaks, it’s the CEO who has to exercise judgement on what the impact of a crisis is on the business and decide on the appropriate course of action, rather than relying solely on the opinion of advisors and comms teams (although they certainly have their place). Likewise, it’s the leader who needs to ensure, and thereby feel confident, that the values of the organisation are understood by each and every employee right through to those in the supply chain.

Easier said than done, perhaps, but weak links in organisations are causing catastrophic consequences. Patricia O’Hayer, Vice President of Global Employee Engagement at Unilever says: “Today at any point in time anyone can mobilise a maelstrom of activity which challenges a company’s reputation, so never discount a threat as insignificant or not credible… But it’s not all doom and gloom, a company’s reputation is an asset that can be managed and bolstered each and every day.

“Invest in your employees as the first line of defence, they are the best advocates for your company… and hold your suppliers accountable to use your products, speak well of your company and adhere to your standards, [as they] too have a vested interest.”

It’s about drilling home what’s at stake to the whole business, adds Martin Sutton, Head of Corporate Assurance at National Lottery owner Camelot Group: “On the very rare occasions that a player has a problem with our lottery systems, we know that, no matter how small or temporary the problem may be, news of it will spread like wildfire on Facebook and Twitter… [but] most crises start small and like a storm approaching don’t necessarily in themselves warn you of what’s about to come.

“It’s a fine judgement and the first indications often won’t lead an inexperienced manager to think this is indeed a crisis… [so] we put all of the senior executives through a training process, which I found incredibly useful because you know what to expect in those first 24 hours that define the overall response.”

Let’s not forget that with all of this, good non-executive directors have a role to play in protecting the reputation of the business. Leslie explains: “I think it goes back to the board… If you have an experienced board that is capable of taking an appropriate assessment of the situation, the company’s leadership is likely to be helped in taking the right decisions… It’s difficult once the press get involved but it is the role of the board to take a balanced view and a balanced response.

“In a crisis, it is a question of being prepared, it is a question of being transparent and honest, and it is a question of having people who are mature and experienced. [They] know that as a CEO you will have a crisis during your tenure.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.


The Eurozone: What’s Your Plan B?

Focus on the world’s fastest growing economies – that’s the message from business leaders on how to deal with Europe’s currency calamity. With Greece remaining mired in debt, and Spain, Italy and Portugal relying on the positive signals coming from the European Central Bank to buy sovereign bonds, the fact is that businesses simply cannot afford to adopt the equivalent of austerity measures if they want to prosper.

Jim Wilkinson, Group Finance Director at online gaming company Sportingbet, has needed to act quickly as Spain and Greece accounted for about 50 per cent of the European business. “We have withdrawn any cash balances out of those countries on a frequent basis and have reorganised our European business to match costs to revenue in local terms.”

Part of the solution, for Jim, has been to develop a standalone business in Australia: “It is well away from what may be happening in Spain and Greece and completely separate and immune to the currency troubles in Europe, to the extent that other currencies ever can be immune.”

Stephen Dury, Strategy & Market Development Director at Santander Corporate, Commercial & Business Banking, says: “Many of the SMEs that we have been working with are looking at the fast growth markets in China, India and Latin America to diversify outside the eurozone [and]… deliver more stable and sustainable income growth.”

The crisis reaches across all sectors. In British farming, for instance, there is a particular threat through the weakened currency. Tom Taylor, Chief Executive of the Agriculture and Horticulture Development Board, says: “The weak euro is giving imported pig meat a price advantage when compared to the UK product, and European pork is 12 per cent cheaper, just because of the euro, than it was a year ago, so the ability to sell UK products is being affected.”

In response to this, British farmers have also been looking to Asia. Tom says: “We’re actually now exporting to 50 countries where the currency isn’t having as big an impact… The first contract for pig meat to go to China was signed only a month ago for a £50 million deal and the first shipment went last fortnight.”

With there being so many variables to the crisis, each leadership team will need to devise their own solutions. Mary Jo Jacobi, NED at Mulvaney Capital Management and a Criticaleye Associate, says: “This macroeconomic uncertainty forces businesses to reconsider their plans yet makes developing new ones nearly impossible.

“Leaders need to remain focused on their primary objectives, factor in what has changed and what is changing and be confident that their strategy is sufficiently flexible; snap decisions based on today’s headlines are unlikely to yield positive results.”

Crystal ball gazing

Naturally, international expansion won’t necessarily be right for every business, but it does make sense to factor in and reduce exposure to particular eurozone risks. Nigel Burbidge, Risk Advisory partner at professional services firm BDO, says: “We have worked with economists to provide tailored workshops and economic forecasting for specific businesses, looking at the key risks for them and possible ways to mitigate those and gone from there. The problem is there is no one-size fits all answers for this – you have to form judgments for your case.”

Fortunately, leaders are recognising the scale of the risks, especially around areas like supply chains, and are taking the initiative to combat them. Paul Staples, Head of Corporate Finance at BNP Paribas, says: “The level of contingency planning being implemented by corporate clients with existing operations or exposure to the eurozone has accelerated markedly during the last six months.

“[From] how companies achieve access to funding, to reviewing the local banks who are deemed to be suitable counterparties, [and] how they seek to protect their own infrastructure and investments in a volatile market environment… this level of preparedness is no longer seen as overly conservative, which is testament to increasing concern over weakening economic data across both the European periphery and major Northern European economies.”

Mark Spelman, Global Head of Strategy at Accenture, notes: “While a combination of the European Central Bank’s action on liquidity and the European Union’s rescue funds have bolstered the fiscal system, the key structural problems of competitiveness [in the Union] remain unanswered… Business leaders must look into the abyss and have a base case for how they manage continued uncertainty.”

As ever, the best defence will remain a calm and confident leadership team equipped with a sound understanding of their business, its risks, and agility when it comes to strategy.

David Garman, Chairman of commercial laundry suppliers JLA, takes a pragmatic approach amid the endless speculation: “I don’t know what’s going to happen in the future and neither does anybody else… Decide what you want to do about any particular scenario when it becomes a reality, rather than wasting time that you could be spending on improving the fundamentals of your own business.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.


Exits: A Question of Quality

Don’t be deceived by Facebook’s $1 billion (£629.8 million) purchase of Instagram, a company that is less than two years old and has yet to make a profit. In the real world, those companies looking to sell need to show a track record of reliable earnings and prove that there really is the potential for substantial growth.

Nigel Guy, Chairman of recruitment company The Cornhill Partnership, says: “The challenge for anybody buying a business until now has been the uncertainty of what levels of earnings you’re buying… The worst thing in the world, if you’re a buyer or seller, is to be involved in a transaction where halfway through you discover the numbers are going soft.”

A strong dose of realism is required. “There was a time when just turnover and EBITDA [earnings before income, tax, depreciation and amortisation] were enough to put a story together that got a reasonable valuation, but that’s clearly not the case anymore as it is so much more competitive now to get exits,” says Richard Adey, Chairman of JCC Lighting.

Within the boardroom, there has to be alignment on the timing of a sale and agreement about what an appropriate valuation could be. Paul Brennan, Chairman of hosting software company OnApp, says: “During any recessive cycle, buyers can say that your earnings aren’t growing at the rate that they were and they’ll bump down your valuation. So if you’re targeting an exit, you have to make sure everyone has a reasonable and rational view of what the exit value might be.”

Easier said than done, perhaps, but there is no shortage of potential buyers for UK businesses, especially on the international front. Peter Hemington, Head of M&A for professional services firm BDO, says: “We’ve seen lots of overseas interest on the buying side. The UK is perceived to be cheap and is getting attention from India and even the US.”

When it comes to valuations, Peter notes there is something of a “weird imbalance” in the market. He explains: “If a company is any good, it should get a healthy price. We have seen small businesses going for big multiples of EBITDA because, on the other side of the equation, there are massive amounts of unused private equity funds and corporate balance sheets stuffed with three or four years of uninvested cash. Deal volumes are low, but prices are relatively high and deals relatively straightforward to transact.”

Never the bride

For fair to middling companies, it continues to be hard to stir up interest. Chris Hurley, UK Portfolio Managing Director for private equity firm LDC, says: “Things are tough out there but high quality businesses with a competitive advantage are still attractive to PE and trade buyers alike. If you’re a ‘me too’ business and there is nothing distinct about you, then you are going to struggle to sell in today’s market.”

The challenge is to make a business stand out from the crowd. Chris, who recently worked on the £148 million sale of lingerie and swimwear specialist Eveden Group to Tokyo Stock Exchange-listed Wacoal Holdings Corporation, says the strategy was always about developing the business beyond the UK market.

LDC made its initial investment in Eveden back in 2006. Clearly market conditions changed dramatically and Chris reflects that after a period of de-gearing the business, a key decision was to make an acquisition in France in 2009 to drive on Eveden’s pan-European penetration. “It’s an extremely strong business and brand, notwithstanding it being consumer facing,” he says.

By contrast, Richard, who joined JCC Lighting last year, has deliberately opted to rein in the company’s expansion strategy: “We do sell internationally but I specifically closed some operations to concentrate on the UK market. You have to be really focused; at a certain stage in a business’ development strong international growth is a requirement but I don’t see that for us now as there is such an opportunity in the UK. The danger is that all you do is spread yourself too thinly.”

It’s an approach that demands both discipline and confidence. “You don’t carry legacy, you just kill it,” he says. “We have halved the number of products in our range as otherwise you end up managing your past as opposed to your future – and you have to clear your debt too and be really focused on it if it’s there.”

The fact is that executive and non-executive directors have to palpably work harder to achieve value as it is rare, outside of the tech sector at least, for buyers to purchase solely on the promise of future earnings. “What’s happened is that the middle-tier deals that were getting done at over-inflated prices no longer really happen,” says Chris. “Values have fallen because people can see there is nothing special about them.”

Simon Burke, Chairman of Bridgepoint-backed arts and craft retailer HobbyCraft, says that when it comes to PE firms, “the old notion of trying to achieve 30 per cent IRR [internal rate of return] and a three-year exit has gone out of the window”. He explains: “PE houses are now much more focused on the overall levels of return and are flexible in terms of timings. Investments have commonly got four, five-year or sometimes even longer horizons. Sensible PE houses are sensitive to creating the right moment in a company’s evolution to exit rather than looking at watches the whole time which, if I’m honest, is a much more intelligent strategy anyway and probably more likely to maximise value.”

Zero hour

Whether it is a trade sale, secondary buy-out or a flotation, there are genuine exit options for businesses at present. However, if the right results are to be achieved in these exacting market conditions, the CEO and chairman need to be working together and communicating openly as simmering tensions can fast become calamitous as a sale draws near.

It comes back to alignment. Paul says: “Some might be pushing for an exit and some resistant; there will be different personal views and all will be valid. If you are going to target an exit you need to know the primary shareholder’s mandate.”

This can create challenging situations, as the management team which has built up a business may not be right to take it to the next level for a sale. Simon comments: “It’s best to talk about the exit up front and get everybody on the same page from the start. That gives you a template for later on about what your objectives are. The biggest difficulties occur when people have wildly different expectations and you’re approaching the point of sale and things haven’t been resolved.”

Advisors have an important role to play too. Aleen Gulvanessian, a Partner at law firm Eversheds, says: “You need to be totally ready before the process begins, identify problems early and solve them before embarking on a sale; the cleaner your company appears, the smoother the sale process will be. Even if the buyer is prepared to take certain risks, you need to remove potential liabilities because it does affect the price. Don’t give buyers cause to get nervous.”

Although the latest incarnation of dotcom companies may be proving an exception to the rule, the difference today is that buyers generally want to see real revenue. “It’s much more about what channels you’ve established and what partners you have,” says Paul. “From the exiting party’s point of view, you have to do your homework. If your business neatly fits into the gap of a competitor’s portfolio, you need to be able to explain that with reference to accounts and really show why your company fills the gap in the marketplace or blocks off other competitors.”

The financials and story for growth have to be watertight. “It’s not just about trading,” says Simon. “It’s a question of where a business is pitched in the market, what opportunities it still has and how you can prove those opportunities.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.


A Winning Exit Strategy

At the best of times, a genuinely successful private-equity backed exit requires a blend of skill and luck. Evidently, current market conditions remain far from ideal and that puts additional pressure on management teams, chairmen, advisors and PE firms to be aligned and clear from the outset about the best strategy for a sale.

John Cole, a Criticaleye Associate and ex-chairman of valet and car cleaning service Motorclean, which was recently sold in a secondary buy-out, says: “Ideally you should have an exit strategy at the time of buying the company, or, if you have built up the company from scratch, then some years before the exit process begins.”

All too often that basic principle can be lost on management when they go through the process of attracting a third-party investor. Robin Shepherd, a serial entrepreneur who has worked with PE firms and is currently CEO of home-audio and visual business Cornflake, says: “You have to write your exit strategy as part of your initial business plan. It’s important to identify what your fundamental business objectives are.”

Although that initial plan will pretty much be guaranteed to change, it’s necessary so that expectations on all sides can be managed. Whether it’s a trade sale, secondary buy-out or an IPO, there has to be general agreement about what each route means for management and investors.

Tim Farazmand, Managing Director of Deal Origination at PE firm LDC, says: “It’s about where the management team want to be or what they want to do after the deal. If it’s a trade sale, they need to think about how their role and position might change post deal, while there are certain boards that won’t work in the public market space. For me, that would discount the IPO as an exit route so you examine trade or secondary routes.”

In an ideal world, a wider number of routes will increase the chance of getting a good exit. Alex White, a Partner at professional services firm BDO Corporate Finance, comments: “The first thing in terms of maximising value is that the company and the management team are open to a variety of exit options. As soon as you start chipping away at certain options, you reduce the chance to maximise value.”

A robust succession plan will, in many instances, also add real value to a business. If the executive team intend to leave after a deal is completed, a buyer will want to know if there are suitable replacements to fill the gap. “If one or two of the key people who have got the business to where it is want to exit, then you need to have the succession in place to ensure there is continuity,” says Tim.

Meet the chair 

Countless stories abound of acrimonious fall-outs between investors and management. In order to help avoid this, John suggests that the exit should regularly appear on the agenda of board meetings so that management grow accustomed to the idea and feel integrated in the process. “A sudden introduction of the subject [of an exit] after a few years can lead management to distrust the motivation of its shareholders,” he warns.

The chairman will be vital as the company goes on its – theoretically, at least – three to five year journey toward a sale. Gerry Brown, Chairman of Novaquest Capital Management and a Criticaleye Associate, comments: “The chairman has a very important role to play because he/she represents the interests of whoever owns the business at the end of the day, but they also have to represent the management.”
It’s a delicate balancing act.  “Sometimes there are different agendas and it’s the chairman’s job really to make sure that all parties are represented. That’s not easy, but that’s the objective,” says Gerry.

Robin concedes that the relationship can become increasingly strained. “It’s tough because the drivers of the PE firm can actually be 180 degrees off from what the executives of the business want. Theoretically, the chairman should be sitting on the fence but the reality is that he is the man who has been put there on the PE side.”

In truth, a PE firm ought to consult management in the chairman’s initial appointment. After all, a degree of disagreement and tension may be inevitable in a business when potentially life changing sums of money are at stake, but open warfare and hostility are something altogether different.  “The role of the chairman is key throughout the life of the investment, helping the management to understand the process and what is expected of them post process,” says Tim.

Added value

When it comes to a trade sale, it usually makes good sense to let it be known that a company is going to be open to bids. “Warming up the market in a controlled and subtle way, ahead of the exit, is very important,” says Alex, adding that this is especially true of the current market where a trade buyer may need a longer time to evaluate the strategic virtues of an acquisition.

“It depends company by company,” continues Alex. “You may get a situation where it’s really obvious there are two buyers that want to pay the most. If that is the case, there ought to be a way of engaging with those buyers years before the exit.”

John agrees. “If you’re operating in a market with few potential acquirers then your business strategy should be designed around appealing specifically to one or more of these potential buyers.”

Unsurprisingly, the element of luck in a transaction comes from the company essentially scratching the surface of its potential earnings, so that an acquirer believes there is ample room to scale the business aggressively. A corporate buyer may pay enormous sums for a new game-changing technology or an innovative service, such as Sun Microsystems’ $1 billion purchase of ‘open source’ software developer MySQL or, more recently, Amazon’s £200 million acquisition of online film rental service LOVEFiLM.

Ian McCaig
, the deputy chairman of energy saving company First Utility and former CEO of, comments that it’s the flexibility of the PE model that gives it a real advantage when trying to build value in a business. “When you are making changes, there are only a relatively small group of people in PE who are making the call. You don’t have to go out to institutions – in a plc, you have a board who you need to get behind the idea. Then you also have to get shareholders behind it and that can be a very lengthy process.

“In PE, you get decisions a lot faster and you can crystallise the ‘yes’ or ‘no’ much more rapidly than you can do in a public environment, to my mind. The PE firm will want robust plans, which is fair enough and they look for clear milestones so you just have to do what you said you were going to do. It feeds into an environment of you being very realistic – you don’t over promise as under delivery has serious consequences and repercussions.”

Market forces

At present, a large number of deals in the UK and Europe continue to come from secondary buy-outs as firms are under pressure to invest funds. That’s not to say that excellent trade deals aren’t still happening, as of course they are, but an air of caution persists among many dealmakers. “We all thought there would be more exits on the go in the first half of the year,” says Tim. “Perhaps it was just general economic uncertainty that meant exits were being delayed, but we do see some momentum now.”

A lack of realism over valuations remains a barrier to transactions. Gerry says: “The issue is about trust… There is quite a lot of money around, certainly in private equity, but people selling businesses are demanding high premiums, especially for good quality businesses. I think that things are improving but it’s nowhere near what it was at the height of the boom a few years ago.”

It doesn’t help that IPOs remain largely shut as an exit route. In general, conditions are set to remain sluggish with activity levels way behind those in the emerging markets. Claudia Zeisberger, a Criticaleye Thought Leader and Academic Co-Director of the Global Private Equity Initiative (GPEI) at INSEAD, comments: “In China last year 80 per cent of exits came through an IPO, which amounts to around 180 deals… At the moment, growth equity is the name of the game in China.”

Given this surge in activity, it’s not surprising to hear that starting a General Partner (GP) fund is increasingly popular. “The number of new GPs set up over the last 18 months is amazing,” says Claudia, who only sees this trend and the number of exits continuing to rise in the years ahead.

Back in Europe and the UK, it’s a case of having to work hard to get a transaction through. With exits stalled due to the economic slump and some PE funds effectively being forced to sell, management teams must be switched on to ensure that the terms of a deal really do deliver.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon