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Finding a successful exit strategy


Published: 29 Jun 2022

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Wall Street wags have updated the maxim ‘Markets hate uncertainty’ to ‘Bad certainty is better than uncertainty’ – and exits need some certainty to complete. Jason Sinclair talks to corporate finance advisers about preparing for the coming economic dip.

With the repercussions from Russia’s renewed invasion of Ukraine coming on the back of pre-existing inflationary supply-chain and labour market crises, the consensus is that an economic dip – or worse – is coming to the UK. But this ‘bad certainty’ means preparation is possible. And, countering any gloom, investors are bursting with undeployed capital. What does this mean for businesses seeking an exit to private equity or corporate buyers? How is it affecting the work of advisers – and how can they add value for clients in testing times?

Jane Vinson Head of portfolio, BGF, south of England

What’s the situation in the market for exits?

Last year was our most successful year ever for exits, with 39 divestments delivering excellent returns for all shareholders. We saw a high volume of inbound, unsolicited approaches during this time and while it feels like things are starting to stabilise, would-be buyers still have a strong appetite for successful, well-managed businesses that are leaders in their field.

How is that having an impact on the management of your portfolio?

We’re making sure that we’re especially close to management teams during this time, supporting them through the process. Even if an exit does not come to fruition, it’s important not to take your eye off the day-to-day running of your business.

Also, you must be unafraid of saying no if the time is not right to sell. Because we are known as patient capital investors, we can support management teams with that approach while also making sure it doesn’t knock their confidence – they need to understand it’s out of their hands. The business may be performing well, but the sentiment for an exit may not be right, through no fault of management.

What headwinds are you facing?

The biggest challenge for businesses now is the rising cost of living. The flipside is that there’s still a lot of capital out there and valuations remain high. The best businesses will continue to be acquired, as opposed to a frothy market where buyers might be getting less than the best anyway. Management teams need to be far more prepared – they should make sure they know their data inside out and that everything stacks up.

Where do corporate finance advisers add value in this market?

We always tell our portfolio companies to have their house in order, but it’s even more important now. They must know what their story is and have all their data points ready to go.

We’re advising our management teams to get in front of corporate financiers earlier, and then build a relationship over a period of time leading up to an exit. Advisers need to get businesses to understand what they’ll need to do and the amount of time it’s going to take them. They can then work closely with management to make sure they’re as well prepared as they can be.

Chris Black, Financial planner and divisional director, Brewin Dolphin, Newcastle

What’s the environment for owner-managers looking to exit in the north of England?

Times are tough for certain businesses – energy and staff cost rises are definitely a challenge. But equity and debt funding is available for good businesses, which is facilitating exits for quality companies.

There seems to be a lot of activity, with private equity money coming into the region. Everybody seems to have quite a strong deal pipeline and a lot of people have reported that they’re at record levels of transactions, which is an interesting place to find ourselves, given where we are with the macro and geopolitical backdrop.

We’re seeing a lot more clients in the north of England take on private equity investment, taking some money off the table, but being retained in the business long term. We’ve also seen a lot of serial entrepreneurs. That notion of a one-off liquidity event is less common.

How are geopolitical and macroeconomic concerns impacting exit planning?

Geopolitical issues play into inflationary pressure and also cause some supply-chain disruption. But specifically, what owner-managers are seeing is staff costs being one of their biggest inflationary challenges. Obviously, when planning an exit there’s a lot of forecasting and the impact of those rises ties directly into earnings before interest, taxes, depreciation and amortisation (EBITDA) and then into multiples and the value they can realise. So, I think there’s a little bit of concern about how the costs factor into the deal and whether there will be some pullback in terms of expected realisation value – how that macro situation has an impact on EBITDA and value.

We find that when we’re looking after owner-managers approaching a transaction, we will look at different types of exit value and perhaps more deferred consideration. We’ll increasingly have to look at a range of scenarios.

What extra value can advisers bring in times like these?

Multi-scenario planning does help to give the owner-manager confidence in their transaction. Going through a transaction is quite a stressful process, so if we can deliver some value by giving a little bit more understanding of what the future looks like and rehearsing the future scenarios through forecasts, that’s really the best thing we can do for an owner-manager during that phase of transition towards exit.

Catastrophe planning is something we do as a matter of course, but the more instability, uncertainty and challenges that exist, then the more important pre-planning strategies become.

On the wealth management side, we like to have early engagement, at least 24 months pre-completion, where we can do a lot of work with an owner-manager.

Chris Lowe, Debt advisory partner, EY, and member of the Corporate Finance Faculty’s board

How’s the current economic environment affecting exit decisions?

The ability to make decisions is already so much harder now than it was. I talk to various clients and people are talking about ‘long COVID’ – not from a health perspective, but from an ‘operating a business’ perspective.

Investment decisions are continuing – we’re still really busy – but it’s more difficult. The train had left the station on inflation before Ukraine because supply chains and the people dynamic were already out of equilibrium. The labour market shifted so much during the pandemic period that it’ll take a while to get that equilibrium back.

What sort of impact does that have on debt advisory?

Some of the work that I’m focused on at the moment is around the performance of debt that’s already been advanced to companies. Over the past 10 years, there hasn’t been any inflation and interest rates are really low, so nearly all of my clients have investments that are unhedged – where they haven’t managed interest rate exposure.

Now, all of a sudden, we’ve got two things happening at the same time – inflation impacting the cost of operations, which means that earnings before interest, taxes, depreciation and amortisation is potentially going to fall. At the same time, interest costs are going to go up. That’s a difficult dynamic. Essentially, a lot of clients have now left it too late to hedge that exposure away because the cost of hedging has rocketed.

What’s difficult to reconcile is the fact that we’re so busy. Certainly, in my world – debt – one of the drivers is the fact that transactions are moving slowly. That comes down to decision-making. Banks are more cautious, wanting to understand what risks are out there that are really going to have an impact on individual businesses. And that’s quite hard to get to.

John Garner, Managing partner, LDC, and member of the Corporate Finance Faculty’s board

How is the macroeconomic situation impacting your portfolio?

It’s undoubtedly a challenging time for businesses. Management teams are currently contending with rising costs, persistent supply-chain disruption and a marked fall in consumer confidence.

The past two years have shown us what businesses can achieve in difficult times. We’re not changing our approach to transactions or how we support our portfolio in the current climate. We do recognise the role that an experienced investor who’s been through the ups and downs of the economic cycle can make to a growing business in an uncertain environment. Our commitment to invest in at least 100 medium-sized businesses over the next five years still stands.

There will always be external challenges. The most important consideration in any investment or exit strategy must always be the strength of the management team and their growth ambitions. We have an evergreen funding structure, which means we can invest through the economic cycle to support leadership teams to grow their businesses.

Are exits having to become more creative?

A good private equity partner will be committed to helping its portfolio companies to achieve successful outcomes regardless of the external environment. This can always require innovation and fresh approaches to new challenges to ensure the exit strategy is right for all shareholders.

We have a relationship-led approach, which helps us to understand the most desired exit outcome for the management team. Our partnership with SRL Traffic Systems is a great example. In December, we exited the business to 3i Infrastructure after helping the management team to grow SRL from a regional player in the north west of England into the UK’s leading provider of portable and temporary traffic equipment. That exit gave the CEO an opportunity to step back from the business into a non-exec role, while also providing the business with a new investment partner to further support its nationwide expansion.

Rebecca Rennison, Corporate finance partner, EY, Manchester

Are these challenging times having an impact on your work at the moment?

There are lots of challenges out there – not just a COVID-19 overhang, but commodity price increases, supply-chain challenges, inflation and shortages of labour. There are a lot of headwinds out there in the geopolitical environment as well.

The good news is that there’s still lots of capital available in the market – specifically in private equity – so while the world is a different place, deals will still happen.

However, the mood has changed. Previously for transactions, you could really focus and get buyers or investors excited about the growth. Now you need to help them understand the resilience of the business and give them reassurance over the actual business performance today. There’s that extra step and part of being a good corporate finance adviser is how you give them that evidence-based reassurance. What in your business makes you special? What makes you attractive? How are you faring relative to your competitors? That forecasting in this environment is incredibly challenging. But it’s now more important than ever – acquirers need you to be realistic.

Are you having to renegotiate exits and be more creative with deals?

Where an indicative offer might have been given in a different environment and as they’ve moved through diligence, businesses have updated their views and forecasts and have renegotiated terms. They’ve not completely fallen away. Some have been put on hold, where they’re not going to be deciding today whether to do a transaction. They may still really like the business – they just see too many clouds out there right now.

As advisers, we need to get management teams to be realistic about their situation, evidence it with data and have their stories well-articulated before going to market, with the aim of getting investors excited about growth.

The key thing in the market is the amount of private equity capital out there ready to deploy to businesses, but who can get them excited about growth? Funds that have been raised have to invest. They’ll just be prudent with that, but whatever macro and geopolitical changes there are, they still have to deploy that capital. I’d say I’m excited, but not super excited.

Kirsty Sandwell, Partner and head of transactions, RSM

How will inflation and supply-chain issues affect deal flow?

In a really buoyant market, an average business will sell. In a difficult market, only the best assets will attract acquirers – unless it’s an asset being sold in a distressed situation. If there’s a lot of anxiety across a sector, the large corporate acquirer will disappear because typically they need to focus on themselves. The business looking to be sold might be trading well, but the pool of people who could be buyers diminishes because some will have issues of their own to deal with.

When the available pool of acquirers reduces, then to complete a sale it has to be a really well-polished, well-run business. There needs to be a strategic imperative for the acquirer and the vendor needs to work harder up front to make sure the business is in the right shape to exit

The reality is that so much more work is now already done by sellers in terms of de-risking a deal, with vendor commercial and financial due diligence done up front. Vendors really need to have a good idea about what type of buyer is likely to be interested.

What value can corporate finance advisers bring in more challenging times?

They can tell vendors how to get the business in shape – be the Joe Wicks of the business community, if you like, saying “shift, shape, sustain”. To be a really good adviser you don’t tell clients just what they want to hear, but what they need to hear.

Sometimes vendors think that they want to be sold in a particular way, to a specific type of acquirer. Our role there is speaking to certain investor communities, because we’ll know which of them are acquiring, and getting a feeling for how realistic they’re being. The real value corporate financiers bring is in stopping people from embarking on a process that will not complete. They’ll make sure that they’re in the right shape to have a successful deal with the right type of buyer.

What does the immediate future have in store?

People don’t realise how uncertain the economy is going to be. There are a lot of people in our industry who’ve never seen anything other than near-zero interest rates, zero inflation. It looks like it’s about to become a very different environment.

In 2008, Lehman Brothers went down and there were runs on the banks, but there was a surge in deal activity. It was six to nine months later that suddenly everything cratered. But it took a long time for people to really realise what was going on.

The difference now is that wall of money, which is so great it has to just plough on. What are the choices for uninvested capital held by funds that are not paid to just manage cash? The entire industry is paid to invest. These are unprecedented times.