Private Equity - Navigate

If your business has reached a stage where speaking to Private Equity and preparing for potential investment is on your agenda, BDO’s Navigate brochure can guide you through. This will help you to navigate your way around Private Equity and investors.

KNOWING THE NEXT MOVE PRIVATE EQUITY

DEMYSTIFY

NAVIGATE

ACCELERATE REALISE

CONTENTS:

PAGE

INTRODUCTION

UK PRIVATE EQUITY UNIVERSE

PLOTTING THE INVESTMENT PROCESS

BUILDING THE BUSINESS PLAN

CASE STUDY – WHY BDO

PRIVATE EQUITY IN NUMBERS

PRIVATE EQUITY | NAVIGATE

BDO – NAVIGATE

Many of the world’s most successful companies rely on their founder’s entrepreneurial spirit, ambition and investment.

However, there may come a time when outside capital is needed to finance further expansionary growth, execute a full or partial exit for owners, or optimise their capital structure. A business faces three major considerations when selecting an appropriate source of finance: X What is the business looking to achieve with the investment monies? X How much investment is required? X Which external sources should it be raised from and in which form – debt or equity? Many successful businesses looking to accelerate growth arrive at this crossroad and, whilst access to finance may not be a challenge, identifying the right partner to work with can be. That’s why BDO has created this programme to help ambitious businesses thrive under Private Equity ownership. Following on from Demystify, Navigate offers a roadmap for this complex and time intensive investment process.

Our commitment to the entrepreneur is founded in our heritage, we are passionate about supporting the entrepreneurially spirited businesses who are the driving force of the UK’s economy. All too often we see situations where management teams have closed sub- optimal deals that lack alignment and where something is out of balance. We use our understanding of this market, Private Equity experience and the power of collaboration from across our firm to help businesses and their owners realise their full potential.

THE BDO DIFFERENCE: INTEGRATED ADVICE & SERVICE ALIGNED TO YOUR NEEDS

TAX STRUCTURING

GROWTH STRATEGY

LEAD ADVISER

EXIT READINESS

PERSONAL TAXATION

VENDOR DUE DILIGENCE

FORENSIC SPA REVIEW

PRIVATE EQUITY | NAVIGATE

UK PRIVATE EQUITY UNIVERSE

For private companies seeking to grow their business, the quandary of choice can make the first step of identifying potential investors complex. It is essential that your advisers work closely with you to understand your aspirations and to help navigate you to the right investment house. In the following diagram, we illustrate the universe of available Private Equity investors in the UK.

International inbound

PRIVATE EQUITY INVESTOR TYPE

Venture capital

Development capital Family office

Sector specialists

Regional specialists “Mid market” specialists

Buy and build

Operational / transformational specialists Seeking to transform suboptimal or underperforming businesses, which will typically be acquired at lower valuations

INVESTOR DESCRIPTION

Seed or early stage, often seeks to sector specialise as investments are ordinarily pre- profitability, or even revenue

Later stage, growth investors. Includes regional governmental or pseudo-government agency investment

Investment office of one or more High Net Worth individual(s) and associated family. Focus is on diversification and

Focus on key growth sectors as core investment hypothesis

Regionally originated houses focused on specific geographies and regional industries

Active core of houses seeking transactions with a broad range of Enterprise Values in the UK

A subset of the mid-market, focusing on the acquisition of core “platform investments” upon which additional bolt-on acquisitions will follow

Overseas investors seeking acquisitions in UK

reinvestment of wealth into a range of asset classes, which frequently includes Private Equity-type investment Both active and passive investor via majority and minority stakes in multiple business that are typically held for a longer period than other institutional investors. Often focussed on investment in sectors and businesses familiar to the underlying family

INVESTMENT STYLE

Minority investor, backing a management team and the development of valued Intellectual Property

Minority investor with certain key minority control rights. Passive investment style

Use of activist sector experts to drive strategy

Local industrial knowledge and connections. Leverage local networks and relationships

Focus on deploying target levels of investment capital per deal in attractive businesses. Will require control.

Use of industry experts arbitraging combination synergies and knowledge of sectors

Use of operating partners to deliver transformational change, often including enhancement of management teams

Seeking complementary investments or geographic foothold in UK business environment

and target specific acquisition targets

PRIVATE EQUITY | NAVIGATE

PLOTTING THE INVESTMENT PROCESS

PHASE 1: EXIT REDINESS PHASE 1: EXIT READINESS 3-6 MONTHS

6-9 MONTHS

9-12 MONTHS

12-15 MONTHS

15-18 MONTHS

Entering into a Private Equity (PE) investment is an exciting but all-consuming experience. BDO’s

PHASE 2: PREPARATION

PHASE 3: MARKETING

PHASE 4: DEAL COMPLETION

GOALS X Obtain stakeholder buy in X Early preparation and identification of deal issues X Assess all funding options. PREPARATIONOPTIMISES FUTURE VALUE X Build and develop the 3-5 year business plan model X Assess incumbent management team ability and identify gaps X Plan to optimise trading, working capital and cash performance X Assess business systems and “fitness” to deliver the right financial and operational information X Consider existing financial structure, flexibility and implications of a deal X Consider the impact of any judgmental accounting policies X Early assessment and planning for tax implications of a deal for key stakeholders.

GOALS X Stimulate the PE audience X Drive competitive tension X Obtain offers. LAUNCH THE SALES PROCESS, MARKET THE BUSINESS AND SECURE OFFERS X Issue “teaser” and secure interest under a non-disclosure confidentiality agreement X Active discussion and positioning of the investment opportunity with PE X Measure and manage interest to deliver non-binding PE offers X Shortlist parties and provide additional access to management and materials X Coordinate and deliver management presentations to key potential buyer X Respond to questions and queries arising from the Information Memorandum and other materials, including potential Vendor and Commercial due diligence X Manage potential buyers advisors X Secure funded offers from PE.

GOALS X Close a deal with a preferred PE investor X Manage interaction of legal, tax and financial aspects X Achieve optimal deal structure and vendor protections. FINAL OFFERS AND DEAL COMPLETION X Determine preferable offers and complete final assessment with stakeholders X Choose PE investor and manage underbidders X Negotiate to completion of Sale and Purchase Agreement to match below and documentation, considering the following: – Price/consideration and timing – Terms – Warranties and indemnities/seller disclosures – Closing mechanism and any post-deal adjustments X Complete equity deal and service contracts for “new” management X Deal closing and any associated conditionality or clearances required X Plan for the first 100 days under PE ownership.

GOALS X Agree deal approach and timetable X Identify risks and plan mitigation X Prepare the deal materials. FOCUS ONVALUE DRIVERS AND ENSURE QUALITY OF INFORMATION X Complete the business plan and supporting financial model that tells the the investment and growth story X Prepare the Information Memorandum and other supporting sales materials X Compile and carefully assess supporting financial and operational information X Securely catalogue and host data in a logical and accessible online dataroom format X Formalise timetable and approach, draft process letter X Consider benefits of a dual track PE/IPO approach X Prepare shareholder consents and support to the timetable X Complete statutory audits, health and safety, taxes and pensions and other core assessments in good time X Consider use of an independent Vendor Due Diligence (VDD) report to support the sales process.

collaborative and dedicated Private Equity team runs an

efficient deal process during all phases. We do the heavy lifting which means management can focus on running the business and building value, maintaining trading performance and not becoming distracted with the deal. Our people focus on the drivers of value for Private Equity, mitigating risks and bridging the gap between the entrepreneurial and institutional mindsets. This illustrative diagram provides a high-level overview into a typical investment process and timeline.

PRIVATE EQUITY | NAVIGATE

PRIVATE EQUITY | NAVIGATE 8 PRIVAT EQUITY | NAVIGATE

CASE STUDY WHY BDO VERITON PHARMA (“VERITON”)

BUILDING THE BUSINESS PLAN

Producing a compelling business plan to immediately grab and retain the attention of a potential investor is a critical element of a successful PE deal.

WILL YOUR FINANCIAL FORECASTS STAND UP TO SCRUTINY? The assumptions driving your forecasts must be realistic and backed up with historic data. These forecasts must make sense in terms of the growth rate of the overall market and your competitors. Also ensure you have built in enough costs to support the top line growth. IS THE BUSINESSWELL MANAGED? Prove this with high quality financial information such as monthly management accounts and accurate cash flow forecasting. Also highlight the operational key performance indicators (KPIs) that are used to manage areas such as the sales pipeline and service delivery.

show they have the relevant experience to grow the business. Also be clear on where gaps in the team might exist and how you intend to fill them. ARE YOU ABLE TO RECRUIT AND RETAIN HIGH QUALITY STAFF? Point to a track record of employing talented staff that remain with the business for a considerable time. Talk about the incentive schemes used to achieve this such as bonuses and share options. ARE THE CUSTOMER ECONOMICS PROFITABLE? Prove that the lifetime value (LTV) of a customer is far greater than the cost of acquisition (CAC). Another factor is to show that once you win a customer the majority stay for a long term. Illustrate this with details of the annual customer churn rate.

BDO advised the shareholders of Veriton on the sale to SERB, a European specialty pharma business backed by Charterhouse Capital Partners. BDO supported the shareholders and management team throughout the sale process including: X Working closely with management to prepare the business for sale including preparing the IM and teaser and establishing the messaging on the company’s growth strategy X Assisting with preparing a detailed financial forecast model to present Veriton’s ambitious growth strategy and product pipeline X Identifying potential buyers, both PE and trade, and undertaking early discussions to gauge interest, as well as managing the discussions, management presentations and DD process with interested parties X Providing financial, tax and commercial vendor due diligence to help Veriton prepare its approach to potential buyers and make the process more efficient X Providing SPA and deal negotiation support, working closely with Veriton’s legal team, in order to reach a successful completion. Veriton is an established pharmaceutical company led by a highly experienced management team, with a vision to deliver both unlicensed and licensed medicines for paediatric and adult patients with unmet clinical needs. Headquartered in Surrey, Veriton employs around 40 people in the UK, Dubai and Australia serving the EEA, MEA and APAC regions respectively.

Right from the start of the process, the BDO team were keen to understand the details of our business and very quickly got to grips with the key value drivers. They had the expertise that was required to support the project across all the relevant disciplines and the project delivery was very well managed and coordinated. The BDO team were enthusiastic throughout and were extremely tenacious in making sure they understood our strategic plans and aspirations which was critical when the business backdrop changed (due to Brexit and COVID-19). I enjoyed working with the BDO team and despite this turbulent landscape, they helped us achieve an excellent result to the delight of myself and the shareholders. STEPHEN JONES Group CEO, Veriton Pharma ”

To help you create such a plan, here the key questions that you must answer in the narrative:

DO YOU OPERATE IN AN ATTRACTIVE MARKET?

Confirm the size of the market for your products and services (known as the Total Addressable Market or TAM). Also give comfort that the market will continue to grow. CAN YOU TAKE MARKET SHARE? Describe the competitive advantage of your products and services. Also go further by explaining how you will maintain this competitive advantage in the future. CAN THE MANAGEMENT TEAM DELIVER A GROWTH STRATEGY? The background of the team should

It is important that any business plan is clear, balanced and well thought through. It is the ‘story’ that supports your forecast numbers.

DOES THE BUSINESS HAVE HIGH QUALITY REVENUE?

Breakdown your revenue between the following categories: contracted; repeatable; and one off. The more revenue you have in the first two categories the more interested an investor will be.

PAUL MORRIS Head of Growth Advisory

PRIVATE EQUITY | NAVIGATE

PRIVATE EQUITY IN NUMBERS

PRIVATE EQUITY SPECIALISTS: THE BDOTEAM BDO’s Private Equity group is a highly collaborative network of more than 400 experienced advisers from all disciplines across the firm including audit, tax, M&A, transaction services and corporate advisory. This practical team has a profound understanding of the Private Equity industry, particularly in the mid market. Our people are part of the process at every level, interacting with funds, advising on deals, and working closely with portfolio companies to help them realise their goals.

Q1 2018 TOQ4 2021 VOLUME OF DEALS COMPLETED

800 700 600 500 400 300 200 100 0

164

117

103 80

>1,200

We audit US$11.8bn 97,000 167 £46bn 68% >550 >250 We work with generated by people across Private Equity backed companies deals worth

125

Private Equity backed companies work with us

Private Equity houses

121

110

96 108

435

of our deals involved Private Equity

In 2021 we completed

631

622 609

592 612

509 485 488

509

507

506

486 521

423

338

Globally BDO’s 2021 network revenues were

214

countries

The investments we’ve made in infrastructure, resources and talent mean that we offer a powerful combination of service, scale and expertise; and through our deep working relationship with each client we can focus on their unique needs and deliver practical individual solutions. We’ve never lost our agility and personal approach. We understand the intense pressure that comes with the challenge of entrepreneurial growth, and we work strategically alongside our clients. Private equity can offer huge rewards to businesses, but knowing how to manage it effectively makes all the difference. That’s where our team comes to the fore.

2018

2019

2020

2021

Trade

Private Equity

PRIVATE EQUITY | NAVIGATE

READ THE NEXT IN OUR SERIES: ACCELERATE

WE WANT TO HEAR FROMYOU

For Private Equity backed companies to focus on topics such as how to maintain alignment and generate growth.

The journey to Private Equity investment may be complex, but whatever your motivation, we are searching for ambitious businesses to help navigate

through this chapter and enhance future growth.

Contact JAMIE AUSTIN on +44(0)77 7192 8208 for more information. We look forward to meeting you and learning about your business.

OUR PE BLOG SERIES COVERS A NUMBER OF TOPICS THAT MIGHT BE RELEVANT FOR YOUR BUSINESS.

Definitions in this document have been sourced from industry bodies BVCA and ICAEW (‘A Guide to Private Equity’; ‘Private Equity Demystified’).

FOR MORE INFORMATION:

This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any responsibility or duty of care in respect of any use of or reliance on this publication, and will deny any liability for any loss arising from any action taken or not taken or decision made by anyone in reliance on this publication or any part of it. Any use of this publication or reliance on it for any purpose or in any context is therefore at your own risk, without any right of recourse against BDO LLP or any of its partners, employees or agents. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members’ names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO member firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate

JAMIE AUSTIN +44(0)77 7192 8208 jamie.austin@bdo.co.uk SARAH ZIEGLER +44(0)77 7299 0354 sarah.ziegler@bdo.co.uk

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