Some people would say that it was madness, but I found it liberating to know that I had blocked off an escape route and that the only way was forward. Having withdrawn from the job search process and informed head hunters I was out of the game, I had but one goal and that was to achieve a management buy-in (MBI). To facilitate this process I had to earn just enough to support the household and preserve my savings for the stake I would need for my share of equity. As John Major resigned the leadership of the Conservative Party to trigger a leadership election in June 1995, thus burning bridges in the hope of winning party support, I made my own play for future success. My bid was rather less exalted but it was critical to me and had a similar air of ‘do or die’.
A corporate finance partner at Grant Thornton I had met during the due diligence process at Selmar was my initial port of call. “Why do you want to do this?” he enquired when I had finished laying out my plans. “Because I can be a whole lot more successful at running businesses than most of the clowns I’ve worked for!” “Wrong!” he shot back at me, “You stand in front of a venture capitalist and tell him that and you’re finished.” I felt perplexed and my look must have revealed my confusion. “You’re doing it for the money, you want to make shedloads of money for yourself and for them. That’s what they want to hear.”
My first task was to commence my own due diligence on the process of achieving an MBI. I started this by talking to several contacts, eitherold or new, who had managed to get VC backing to either buy-out (MBO) or buy-in to business. Their advice was interesting but the one phrase that struck me as invaluable given my own experience with cash was, “Never buy what you can borrow and never borrow what you can steal!”
An essential element I absolutely had to ensure was in place was a contingent fee arrangement with a firm of accountants and a lawyer firm. To get a deal to completion meant accounts and lawyers putting a great deal of hours on the clock for both accounting and legal due diligence plus all the work on the finances, deal structure and the sale & purchase agreement. These costs would run to hundreds of thousands of pounds and without this ‘no win, no fee’ arrangement in place, failure to complete a deal would ruin me. In the deal-charged environment of the 90’s all of the major accounting and law firms realised that without such an arrangement the deals would simply never happen. The quid pro quo was an acceptance by VCs that transaction fees would be inflated for success. It was a feeding frenzy.
The combination of my approaches and CV got me meetings with the corporate finance partners of every major accounting and law firm I approached. A vast amount of highly practical advice flowed from these meetings, which was adding to my rapidly growing knowledge of the intricacies of the MBI process. All lost no time in telling me how difficult it was to achieve and how risky it was to buy a company as an outsider, “You just won’t know where the skeletons will fall out of the cupboards!” Knowing that it was going to be a lengthy and fraught process, the key aspect both parties were assessing was the personal chemistry. There had to be mutual respect and trust, something that I was well aware of, but something that would also be brought into a stark spotlight in the future. The result of many meetings was an agreement of backing from KPMG and Pinsent Curtis both in Leeds.
With one vital building block in place I started contacting all of the major VC firms. Again I succeeded in achieving meetings at director level with every firm I approached. The choice of equity partner transcended almost every other consideration. Yes, you would share equity in a deal but management equity was a very subordinate animal to that held by a VC. I knew that all firms could and would be ruthless in the event of non-performance but there were other considerations that I knew to be critical. Most of the firms I talked to had a strict policy of exiting from their investments within a set time period, being driven by the way they raised finance. I had met one management team who had almost been sunk by being forced to refinance as a result when their business was going through an appalling difficult period.
The one exception to this almost cast iron rule was 3i whose policy was that management drove the timing of exit. With its roots in the Industrial and Commercial Financial Corporation and the Finance Corporation for Industry going back to 1945, 3i had probably more experience and understanding of financing private businesses than any other VC. I had had a welcome and very useful initial talk with the head of the Leeds office and, following all of my other meetings, I decided that I simply had to get 3i backing. The head of the Leeds office was Jonathan Russell (who went on to become a main board director) and underlying his smooth and urbane appearance and warm welcome was a very shrewd businessman. After I had filled him in on my success in getting contingent fee arrangements in place with KPMG & Pinsents, he leaned back in his chair, nodded and enquired, “Anyway, how’s your job search going?”
This wasn’t a trap I was ever in danger of falling into and took delight in firing back, “I don’t have a job hunt. I’ve closed all the corporate doors and I’m going to succeed in achieving an MBI with you. That is my future.” I was then vetted by Patrick Dunne (who ran their MBO / MBI programme) in London and was then able to benefit from the vast knowledge 3i had gained in this sector. From their research I was able to ascertain just how many MBI candidates there were in the country attempting to achieve the same goal as me. Comparing this number (over 2,000 from memory) with the number of deals actually completed each year (210 in 1994) was, at face value, disheartening. Of these only 28 were MBI transactions that had been completed! When I considered the reasoning behind Jonathan’s question about my job search and added this to the knowledge I had gained so far I realised that the odds were better than the apparent 1.4%. Clearly some of the c2000 executives seeking a deal would also form part of a team of 2 or more. I also knew from my research so far that the majority of people who claimed they had a goal of an MBI merely waited for the deal community to throw up an introduction to a potential transaction. I had already decided that I wasn’t going to sit around waiting for a deal to show up, I was going to make it happen. When I added this self-sufficiency to my competitiveness and determination, I decided the odds were rather better at around 8~10% pa. Good enough for me.
I started work on a methodology for searching for suitable targets. The advice I had been given so far was to buy a dog. What was meant by this was buying a failing business and turning it around would yield fantastic returns. The problem I envisaged with this approach was that the margin for error narrowed to almost zero. Problems come from all angles even in a good business that one knows well but buying into a failing business raised the stakes dramatically. No, I decided, I would buy a profitable business even if the price was higher but it wouldn’t be balanced on a knife edge from day one. The obvious approach would be to attempt to buy a business in a sector where I was experienced, so the lighting industry had to be on my target list and I started making approaches to all my contacts in this sector.
I had drawn up a list of ideal criteria for a target company and this included:
- Privately owned
- No more than 3 shareholders and ideally same as directors
- In business for between 15~30 years (potential retirement sale)
- Turnover between £3m~£25m
- Profitable and cash generative
- Engineering, industrial manufacturing or distribution
- Were differentiated in some way (or could be)
- Had growth potential.
Obviously businesses in declining sectors were out and I also decided that I would have nothing to do with those selling consumer products into high street retailers. I new that Companies House had all the information required to ascertain if the first 6 criteria could be fulfilled for a small fee. However, there is no way one can carry out a criteria based search from this source (needles and haystacks). However, I knew that there were many credit agencies and other research companies who bought the entire information from Companies House and compiled databases that could be searched by criteria. Their fees were beyond me though.
Leeds business library proved to be an excellent halfway house for the information I required. It had research reports on a vast number of UK business sectors and it had searchable databases that would give me a snapshot of likely companies. In addition, the cost of information was only £0.10 a page. I would blitz a business and geographic sector and come away with a single page on each of around 200 companies. Returning to my office at home I would wade through this information refining it down into a short list of 20 to 30. I would then arrange a meeting with Phil, the corporate finance partner at KPMG and we would then discuss each one and agree a final list of 10 to15. Phil would then get one of his team to run off a complete financial history for the last 5~10 years in great detail for each one.
Back in my office I would then input all of the resulting data into a large spreadsheet model I had developed that would produce key ratios, further analysis and graphs. The resulting report I produced for each company showed at a glance a clear picture of the health of each business plus all of the relevant trends. I would put together any further information I could gather as desk research and then get together with Phil to review the results. These reports together with our discussions enabled us to whittle the list down to 5 to 8 key targets. Having discussed the various ways of approaching these targets Phil counselled that we would get a better response if he approached each company saying that he had a client with funding in place who was interested in a purchase.
Whilst carrying out this research I had been working my way through all of the potential businesses I knew in the lighting industry that were worth an approach. I had meetings with a number of potential targets but despite serious interest from the owners there was really nothing worth pursuing. I was waiting to hear of the results from the initial batch of letters Phil had sent out when he gave me a call and suggested we meet. He explained he had information on a paper processing business that was for sale and he could introduce me if I was interested?
Was I interested! After months of work I was off running with a lead on a business that was for sale. Would it shape up? Could I pull off a deal?
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