Cambridge Caledonian

Is the rush over?

We've completed six deals in the first quarter of this year. Lots of people have said to me that it'll quieten down now that the rush to beat the change in Capital Gains Tax rates is over. I'm not so sure; all bar one of the deals we have closed have been in the pipeline for some time, and in most cases since before the tax changes were announced.

Usually a disposal takes 3 to 9 months but it can take longer. Certainly the impending increase in tax focused the mind, and drove the timetable, but I reckon all bar one of these deals would have happened anyway. We don't do purely tax driven deals - so I don't think it'll be a significant factor.

More important might be the continued worries about credit. The standard line so far has been that for deals below £100M it will have no effect. At some point it must impact on trade buyers financing lines, and so the prices they will pay, or even their appetite to buy. But on the other hand there may be more opportunities for buyouts from groups seeking to sell non core activities to raise cash. Its an ill wind.

Deal Readiness

Its good to meet businesses well before they are ready to sell, so we can help form strategy, and help them to get in shape for the deal when it comes.   Here’s eight things to think of when getting “deal ready”

1.       Plan early at high level and in detail.  At high level : think about when you expect a deal to happen, what obstacles are in the way.  How must the business change to achieve your exit?  Do you need to raise funding meantime to invest and grow?  At a tactical level when in the year would be a good time to do the deal, usually this will be influenced by any seasonality in the business, or by how certain you are that your budgeted result will be delivered. 

2.       Communication This is difficult, while it’s important to give staff a sense of purpose and a share in the direction of the business, elements of the exit plan must necessarily be kept secret until implemented.    Of course if you are thinking of selling the businesses to a management buyout team – that process needs careful handling – I usually say either fully encourage it within well defined ground rules or forbid it – an ambiguous support risks alienating the key people in the business.  Closer to the deal you need to think about who should be told shortly before or after – key customers, suppliers, shareholders as well as staff.  Also what do they need to be told?

3.       Build your team whatever the plan a good management team is key.  If you want to sell to a private equity house, or a debt funded MBO you need to have a good top team in place, well enough ahead to be bedded in and credible.  The chemistry amongst the team is important – I’ve met lots of owner managers for example who have hired an apparently good top level manager only for them to fail the “fit” test later on.  It is difficult to do this successfully – but its often key to the strategy.  At the same time as building the wonder team you might think about dealing with dead wood – pruning or transplanting as appropriate.

4.       Get you data together when you come to market the business, and especially when you get to the end of the process you need control of the data.  It’s a common failing to spend too little on the finance function so that it becomes a hard job of recreating data to tell the story of the business, and to provide legal disclosures prior to sale.

5.       Document stuff many businesses keep much of their knowhow stored in a dynamic organic data store – I.e. inside the heads of the assets that go home every night.  Get your key knowledge systematised and documented.  A buyer is much more likely to value it if it believes it can really see and maintain the asset it has acquired.

6.       Establish a track record of forecasting when you come to put together the sales package - and more importantly to persuade someone to pay for potential and not just last years numbers - you need to show that your forecasts are worth the paper they’re printed on.  Buyer due diligence will often include a review to see how good you were in the past at forecasting the businesses performance.  If your not very good at this be self critical, and if your budgeting processes are not working consider a full review. 

7.       Management Bandwidth when you come to doing a deal management time and patience will be at a premium.  Selling a business can be a full time job, but then so is running a businesses and you don’t want either to suffer.  Plan, put teams in place, and don’t leave yourself so plumbed in to the business that you cannot spare time without damaging it.  That’ll also make it easier for you as owner to leave upon sale if that’s what you want to achieve.

8.       Plan for after the deal You will need a 100 day plan to help the acquirer to integrate, especially to keep people happy.  Also if you are going to realise your asset and get lots of cash you need to do some wealth management planning in advance of the deal.

Credit Crunch what Credit Crunch? A sale and an MBO

People ask whether the so called credit crunch is impacting on the SME corporate finance market. Probably not on deals below £100m – and certainly not so based on PEM Corporate Finance’s current experience.

We continue to see strong deal flow. In one recent week we completed two transactions – the sale of a 75 per cent stake in inkjet technology specialist Xennia Technology to Royal Dutch Ten Cate, the Netherlands based textiles and specialist materials group and the Management Buyout of award winning Cambridge jewellery specialist, Cellini.

In addition we have a strong pipeline with further completions expected before the end of the tax year – some of these driven by the impending changes in capital gains tax legislation. Might I offer all this as a reasonable excuse for not having posted for so long?!

Xennia is the world’s first one stop inkjet solutions house, offering a customised service for industrial
applications from initial concept through product development to final printer and ink supply. Xennia combines innovative chemistry and first class engineering to provide integrated inkjet systems.

Its customers include global blue chip companies, equipment manufacturers, and hi-tech start-ups. Xennia has averaged sales growth of around 35 per cent per annum in the last three years.

The company owns a strong intellectual property portfolio and a number of key technology platforms for inks, coating fluids and hardware.

Ten Cate is listed on NYSE, Euronext and the Amsterdam stock exchange. Xaar plc, the inkjet printing technology group headquartered in Cambridge, is a minority shareholder in Xennia and will retain its holding.

Jewellery company Cellini is based in Cambridge. The business was founded in 1981 by its managing director, John Carter, who has now secured succession by selling the business to his three fellow directors Howard Carter (no relation), Antonio De Nunzio, and Peter Hering.

Cellini is an independent company of designers and makers of fine jewellery. It has its own workshops, and holds the largest selection of pearls in the country.

Cellini also makes bespoke designs to client specifications. It is unique amongst jewellers in being fully integrated from manufacture to retail, and in the scale of its operations from its Rose Crescent base.

It is nice to be able to report that the legal work on both the deals featured in this post was handled locally, with John Short of Taylor Vinters representing Xennia and John Carter of Cellini; Jason Wiliams of Hewitsons representing the management team at Cellini; Simon Walker of Taylor Wessing representing Ten Cate; and Zickie Lim of Mills & Reeve representing Xaar on the Xennia transaction.

Capital Gains Tax changes driving activity in Q1 2008

Much has been written about the impending change to the tax regime with Capital Gains Tax rising on share sales from 10% (assuming full taper relief) to 18% in the new tax year.   It seems odd that entrepreneurs who have sweated for years to build a successful business lose out, while short term buy-to-let property investors gain big time.   But whatever you think about the merits - or more likely demerits of the change it is certainly focusing peoples minds.  If you had not already begun to sell your business it is unlikely you can sell before 31 March- normally this takes between 3 and 9 months.   However a succession deal, or partial MBO can be put in place - and we are working on a number of such transactions.   The clock is ticking however - mostly these will involve tax clearances and with the revenue allowed up to 28 days to deliberate they must therefore be away by the beginning of March.  Actually we're getting clearances back in a matter of days at the moment - but I imagine that they will be awash with them in March and so 28 days must be allowed for.   Such clearances cannot be produced without reasonably final documentation - so expect the corporate lawyers to be busy in February! 

But lets not lose sight of the underlying commercial reality amidst all the tax excitement.  If there are things you can do to make your business perform better, or present it better to a potential buyer, or to get competition amongst buyers - doing those things should yield much much more than the extra tax charge post April 2008.   

Business Exit Strategies

Failing to maximize the exit value of your business could cost you millions of pounds.  Not having a clear alternative to sale could mean that your business loses its way and that you fail to build value in your investment.   Sir John Harvey-Jones remarked that “Planning is an unnatural process; it is much more fun to do something”.  He went on to say that “the nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression”!   In reality, quite apart from the potential financial downside, not having a plan is a discomforting experience for entrepreneurs and business owners alike.  Having a decent plan gives a feeling of control – which is a good basis from which to take appropriate risks and to drive the business forward.

A key element of your strategic plan should be working out how to exit the business at a future date.  Alternatively the priority may be to put in place a plan for succession within the business.  Perhaps the exit may be by way a sale to managers in a VIMBO or vendor initiated buyout – sometimes called a succession buyout.     This involves not just preparation of the business financially, but also some forward thinking about the management team.

Even if there is no prospect of an exit for some years to come, it is important to have a clear path for growth and a view of what the business might be worth now and in the future.   With a better understanding of value drivers the business can be groomed for value growth or eventual sale.  This is useful even for a very young businesses – it can  help to explicitly shape the business to suit the objectives of its owners.  Tax is important too, and putting in place strategic objectives of this sort allows early tax planning to align corporate and personal tax strategies.

We are running a series of highly focused events on the topic “Business Exit Strategies” to address these issues.   They are practically focused with interactive sessions and aimed squarely at business owners.  We hope that attendees will come away with a realistic view of what needs to be done to evolve and implement a strategy for growth, exit, or succession.   The events run in November in Chelmsford, St Albans and Milton Keynes, and again in Cambridge next February.

Method or Madness – making acquisitions

It’s a sad fact that the best acquisitions are often the ones that you didn’t make.  That is to say that many businesses fail to make them work as well as they hoped when they did the deal. The whole psychology and process of making successful acquisitions is important whether you are the buyer – or whether you are selling a business and need to understand and properly appeal to potential buyers.

Studies have shown that most mergers and acquisitions have transferred value from buyer to seller.  So why do so many folk persist in trying to buy?  Well it seems that those who get it right and regularly get involved in M&A do enjoy superior returns.    Boston Consulting Group found that it’s the companies who treat the process in a systematic “industrial” manner pursuing a deal only when the expected returns are above the cost of capital.  They found that the three key ingredients for success are strategic focus, valuation discipline, and early integration planning.   This seems kind of obvious – but many companies ignore them. 

I’ve seen a huge range of approaches to this from buyers as we get involved in marketing businesses – and with Cambridge’s technology community this often involves approaching potential buyers around the world.  Different cultures have different outlooks, and of course there is a huge difference between venture capital backed acquirers; very focused on what it does to their value, and the dilutive effect of raising extra equity finance to fund the deal, and quoted businesses; very focused on the headline price/structure and corporate governance issues.  The other thing that really stands out is that the regular or serial acquirers have well established processes for integration.

We sold one business recently where the purchaser flew in with a team of 10 to begin a serious charm offensive and integration plan first thing in the morning after they signed off the deal.  More to follow in later posts about how to get the right strategic focus for M&A, valuations, and integration.

Strategic Planning for Growth

A plug for an event that I am speaking at next week - The Very Early Lunch Club at the Angel Hotel in Bury St Edmunds. The topic is Strategic Planning for Growth. I'm going to give a practical view on how to get a coherent strategy down on paper and, more importantly, how to ensure that it happens. As Churchill said "However beautiful the strategy, you should occasionally look at the results". If you’re starting a new business and need a coherent vision for it, or already have a successful business but have reached the end of your current plan this might be helpful. Or if you have a strategy but need to get your team to buy into it. Strategic planning doesn’t need to be about expensive consultants and weighty dusty gather reports. A good strategic plan will help any business to grow. As the cliché goes Failing to Plan is Planning to Fail.

PEM Technology launched at Cambridge Enterprise Conference

A busy week at PEMCF.     This Wednesday I am speaking at the Cambridge Enterprise Conference - overall topic is how we can grow more sustainable high growth knowledge based companies.  I'll let you know!   

The conference is to be chaired by Walter Herriott of St Johns Innovation Centre.  The keynote speaker is to be Mike Lynch of Autonomy, and the program also includes Peter Harris of Hotel Chocolat (perhaps he'll bring samples?).

Wednesday also sees the launch of PEM Technology - a new group within the firm focussed on delivering "joined up" advice to the technology sector - and the new PEMTech website.   

Control and Value Creation

I am speaking at the Cambridge Enterprise Conference in September. The conference asks the question "How do you create a sustainable, high growth, knowledge-based  company?" Too often growth businesses sell out before they become successful very large businesses – or "gorillas" in the jargon – that the local economy might benefit from.

What is often missed is that whether one is on track to transform an idea into a new business or to grow a gorilla. The objective, if not the short term aim, should be to build value in the company in a way that might be realised. This doesn’t mean one must sell out – but there is research to suggest that entrepreneurs feel satisfied if they are building real value, and more importantly feel in control of the process.

People think grooming of companies only happens in preparation for an exit – but the process works just as well for building value, and creating that important feeling of control. A useful test for an entrepreneur is to ask "how would you feel if a strategic purchaser makes an unsolicited approach to buy your business?" What first impression would you make? Grooming is all about reducing the risk that the business is not fully valued.

Of the many grooming opportunities four key areas are strategic, financial, people, and shareholders.

Strategically the aim is to shape the business to be attractive to a potential buyer rather than making short term presentational tweaks. Strategic grooming might include closing or selling businesses that don’t fit, or conversely building business in areas vital to the exit story.

Tidying up a company’s finances is also key. This should include better financial controls, more emphasis on reporting profits, better management of working capital and creating a credible track record of budgeting. Credible budgets and forecasts can enhance value – many buyers will review old forecasts to assess historic forecasting accuracy.

People are paramount. Having the right team in place adds value. Too many businesses depend on the entrepreneur leading them. A Management Buy-out becomes a possibility as an exit, or for financial planning reasons if a good team is in place. Above £10m of value a good team permits the sale to a financial buyer – plenty of them around in today’s market.

Shareholder issues which can be addressed prior to a sale include forming price expectations, and who will give warranties - institutions typically don’t.

Lies damn lies and statistics.......

I attended a competitor's seminar the other week on selling businesses - more of a pile them high broker than a bespoke M&A boutique or seller of quality business as we like (modestly!) to think of ourselves.   However competitive intelligence is good for the soul! 

A lot of what they had to say was quite sensible.   In particular they rightly pointed out that while the normal distribution of outcomes for company sales suggests that a earnings multiple of 7 is the likely outcome one should aim to be at the end of the graph where strategic premiums are paid.

I take issue with two things.  The first is the suggestion that accountants just use the average and "value" businesses on a 7 times multiple.   No doubt some do - but we are at pains to understand what will really drive value in a business and make it strategic to  a buyer.  We also work hard to find - from some serious research and thinking - a good range of potential strategic purchasers, internationally if necessary.   I tell anyone who will listen that "valuation" is only of interest to tax accountants, lawyers and the divorce courts.  I do accept however its relevance to share options and Venture Capital pricing .

Incidentally beware of anyone who quotes the law of averages at you.  This suggests that because on average the earth suffers a catastrophic asteroid strike once every 65 million years that we are OK for another 35 million years.  Of course one could strike tomorrow and not disturb the long term average if the following strike was over 100 million years out!

The second thing I disagree with is the implication that there is a strategic buyer out there for every business if you just research hard enough, make enough calls, and scatter the businesses details wide enough!  This is washing your linen very very publicly - and the reality is that some businesses whilst no doubt making a good living for the owner are just the wrong size, shape, colour, location or whatever to capture a strategic buyer. 

Of course if  you take the broker approach and take a big enough fee for your up front work that you make good money regardless of whether the strategic sale materialises then you don't care.    I'd rather put my money where my mouth is and take on assignments where I really feel that we could make a difference, and I think honesty at the outset about the prospects for the sale is a far better way to do business.