Chair, CEO and author are just a few titles that Jim Chambers has been known by during his stellar career. He has in worked in private companies, a plc and in private equity-backed businesses in and around the education marketplace. Jim has led eight transactions including: sales, mergers and acquisitions – the largest being a £56million MBO of a vocational training business. As a non-exec, he has been involved in a further four transactions: a university spin-out and three successful exits. Here he outlines seven areas to consider when thinking of an exit – coined the ‘Supreme Seven’.
At various times, my family have accused me of being a deal junkie! And here’s the first general observation; for the more complex but not necessarily the largest, and demanding deals, that is exactly what is required of a CEO or executive chair. When selling a business or undertaking an MBO, the deal takes over your life. You have no space for anything else irrespective of where in your life’s journey you may be. That can be especially tough if you have a young family. The demands are unremitting, not just to complete the deal, but to also keep the business running successfully. I will return to this theme later.
I was asked by Mercia to document my thoughts, experiences and lessons learnt on the back of a recent exit that had been painful, but ultimately successful. It was not a large deal, but it was one of my most challenging and I would draw on the experience whilst it’s fresh in my mind;it will stay with me forever!
There are key learning points as there are in all exits. Every deal is different by virtue of people and cultures; investor expectations and style; acquirer’s attitude; acquirer’s investment rationale and the acquirer’s business context; trade or private equity, plc or private or a trade and PE combination; is the acquirer a competitor? But the processes are similar. So I’ve drawn up seven areas to consider – for me they are the ‘Supreme Seven’.
- Secret formula – your partner’s support!
This is the starting point for me. I have been extraordinarily lucky in having a wife who has been steadfast in her support even when we had four demanding children, who became even more demanding teenagers. She took the load, she bore the full force of their demands (teenage demands are even greater than those of toddlers in my experience!) and she did so without complaint (usually!) whilst finding the energy to support me in the darker moments. In my various deals we have had to cope with cancelled holidays, teenage tantrums, sleepless nights, missed family events, highs and lows. I’ve met so many talented executives who create their own glass ceilings in the pursuit of work- life balance. To my mind that is sacrificing the future of your family to indulge the present, but I realise this is not a popular or common perspective these days. In a demanding deal there will be no balance but it won’t last forever and you can restore that (of sorts) once it’s all over. Some of the deals may be life changing. You may be able to afford your dream house, holiday or car. You may be able to support your children’s education in a way not previously possible. You may be able to support that worthy local charity. And so it goes on.
2. Prioritise chemistry – professional services support
Advisers are of critical importance. I’ve never worked with corporate finance staff or lawyers who did not have the technical abilities, qualifications or experience to do the job. You cannot predict at the outset if the deal will be difficult, relatively plain sailing or turbulent. So how does one find the requisite expert? For me it comes down to the individual. I need to be assured that the lawyer or CF expert I am talking to will be hands-on and will lead the deal. Some will oversee and farm the work out to their colleagues with a focus on optimising billing potentially but beware! In my experience, that can be good or bad, but regardless, you need to meet the advisers who will actually be leading the deal. You have to ask the question, ‘Can you and your team work well with your advisers at the human level?’. When it comes to lawyers, I have an aversion to those who offer brilliant but tedious expositions. I never wanted nor valued that. For me, a more business-like approach was appreciated; a demonstration of understanding, interpretation and the offer of a range of options for solving a particular issue with recommendations as to the preferred route forwards were more valued. I want lawyers to engage with me as to where our real red lines are and the same for CF advisers. I want my CF advisers to discuss tactics and create good relationships with their counterpart. Relationships matter! In this deal most recently completed, our acquirer promised a straightforward process with a short timescale (never believe such claims; oft made, rarely true). It became anything but. There were difficult moments when the CF advisers earned their fees, as did the lawyers! By all means negotiate on the fee structure, but I prefer not to be unduly swayed by that single factor (but still negotiated hard).
3. Pace yourself!
Whatever the claim, be ready for a marathon, not a sprint. How can one do that? We all have our own approaches, but I like to be clear as to who the main deal participants are to be and the role each will take. That might be obvious in a small company although that guarantees work overload. I regard myself as the conductor rather than the violinist. I place emphasis upon the management of the project; delegation and accountability to retain a handle on all strands on the project plan. All of this is much tougher in a small company of maybe twenty or thirty staff. Then multi-tasking will be unavoidable but retaining an overview is still important. There are some practical things one can do like clear your diary – socially as well as professionally I’m afraid.
4. Keep the show on the road!
Conducting or engaging in an exit process is distracting for the business. That will be self-evident and board members and investors will acknowledge this. Importantly, acquirers will also acknowledge this and may even be sympathetic as relationships build. But I guarantee that this won’t persuade them to be forgiving in the final few furlongs. If revenues, margins or profits have fallen short of your forecast, they will track it and calculate its implications for them. They may still offer sympathy, but they will very likely use this information to price-chip. How can one prevent this? Not easily. Again, this is especially challenging in a small company. When undertaking my MBO, the business did not generally know about the process or of the prospect of an imminent deal. I ensured that only the top execs had a focus on the deal (FD, sales director, ops director, HR director) and involved internal specialists as little as possible. But to ensure that the business continued to perform, this meant a heavy overload on the top execs who still had their day job. Performance reviews, sales forecasting, project planning, board reporting, engagement with critical external stakeholders and customers and a multitude of other elements still needed to happen. If you slacken off and lower the bar staff may relax – it’s human nature. You can’t afford that to happen. For me the solution was to take the additional deal workload, take the pain. All one can do, it seems to me, is stay on top of your agenda; both agendas: all agendas. When things started to slip, I took immediate corrective action to prevent being dragged down a black hole of despair a few days or weeks later. Not easy, but if we can keep trading on track then there will be a dividend.
5. Expect the unexpected!
In the lead up to the MBO of a training business that was built on government funding (apprenticeships etc), the funding rules changed under our feet! We coped by being on top of the agenda, by being involved with the lobbying membership group that regularly met with funding bodies and occasionally with ministers. We had advance warning and had our interpretation of the impact of the changes and the financial implications all prepared, as well as for the new opportunities that they brought. In the last eight weeks of the deal, we delivered weekly bulletins for the acquirer on funding rules and their implications with ‘real time’ trading updates. That became a heavy additional burden, but it was critical in retaining the buyer’s confidence in the business and in us! The deal went through despite a few hiccups. In software businesses you can count on sod’s law that something untoward will happen during the deal phase. A deep lying bug may surface. A security issue may arise. A major customer may pop up with serious complaints, however unusual that may be. All of these things have happened and all one can do as CEO or Exec Chair is buy time for your technical staff to analyse, diagnose, design, build, test and roll out the solutions. Occasionally, teams have worked almost non-stop over the weekend and through nights in response. What I’ve found is that how one responds is key to the acquirer’s attitude. We always opted for keeping them informed, involving them in the analysis and offering them the opportunity to engage and recommend. It always worked out fine in the end, but there is no denying that such events sap buyer confidence and may lead to changes to the deal such as retention of part of the consideration, special indemnities or even a price chip.
6. Beware the prosaic
The time lapse of a deal may be just five or six months but can sometimes span as long as 18 months as is what happened in my last deal. There was an extenuating circumstance no-one could have foreseen: the pandemic! But there are also glitches along the way that can happen in a small company. We experienced the odd accounting error that was born out of a lack of handover from a previous FD incumbent to another. It was due to a misunderstanding not incompetence. It was spotted very late in the day. This has happened elsewhere too and occasionally investors who stand to gain millions will still insist on accuracy even if their disadvantage is relatively trivial. Who can blame them? Frustrating, but we had to get it right; recalculate, renew the waterfall and funds flow, and reset. And in a small company that has its roots as a start-up, we should not have been surprised by the administrative glitches experienced: missed tick boxes on EMI share option documents, missing S431 elections and the like. These are prosaic, dull, tedious but their impact, unless one can secure confirmation from the likes of HMRC (we did with just a few hours to go), can be seriously high on individuals. Note to self: pay more attention to process and basic governance!
7. Be lucky!
Even the best laid plans can go wrong whatever one does. I know people who have had deals collapse on them through no fault of their own or their company’s. I used to believe there was no such thing as luck; you made your own. I was wrong! Be lucky …