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’.
Made with FlippingBook - Online magazine maker