Edward Minton is an investment manager at WestBridge, a private equity firm that invests between £10m and £20m in established, profitable and ambitious UK SMEs with enterprise values of up to £40m. He explains what businesses can do to prepare when looking for investment.
When we look to support a management buyout, we typically seek out companies with proven incumbent management teams that have been running the business for some time pre-deal. Alternatively, and increasingly, we are seeing situations where owner managers have successfully planned for succession and taken a step back from the day to day operations in anticipation of crystallising some value through a partial exit. In both scenarios, our approach centres on the management team and ensuring that they have access to engaged investment and board colleagues.
Management teams come in all different forms but the successful ones tend to be highly entrepreneurial, well rounded, have deep networks within their niche markets and know exactly what they’re good at. More importantly, they are self-aware individuals who understand their own weaknesses and are able to build a team around them with complimentary skills and capabilities to help drive value creation initiatives.
Private equity investors will look for a number of unique business characteristics. At WestBridge we look for profitable, niche market leaders or challengers with strong quality of earnings and a credible growth track record. In particular, we place value on characteristics such as strong trading visibility from long-term contracted revenue streams and established relationships with blue chip customers.
For example, the first investment from our WestBridge II fund was the buyout of a healthcare business that operates five-year outsourced contracts for the NHS, providing fully integrated wheelchair services to the community. This business experiences very little trading volatility which, encouragingly, minimises the risk of adverse surprises! It has now won four more contracts since our investment.
We also look for companies with strong and defensible positions in their niche markets, this being a definitive feature of other recent WestBridge II investments - one being a niche environmental consultancy focussing on the aquatic, marine and ornithology sectors and the other being the market leader in the supply and maintenance of automatic vehicle and train wash systems in the UK.
Evidence of established and effective sales processes is also a strong feature, albeit weaknesses in this area can always be improved post deal to help drive lead generation and top line growth. Of course, not all private equity firms have the same investment criteria but management teams who actively focus on building defensible characteristics are likely to be the ones that successfully carve out a strong market position and ultimately attract private equity investors.
When we are evaluating businesses, we like to see a clear growth plan. The due diligence associated with private equity transactions can be extensive and time consuming, but this can be streamlined if management teams are able to present a detailed and coherent business plan covering a three to four-year time horizon.
It goes without saying that being organised with all the necessary documentation for the due diligence providers to trawl through really helps.
The good news is that an experienced corporate finance adviser can help navigate this process and we would always suggest that a business engages with an adviser about a year before wanting to complete a deal. This sounds like a long time but preparation is key!
When a private equity firm gets involved, there will inevitably be change so management teams must be ready to embrace it.
We support businesses valued up to £40m and many businesses of this size typically require improvements to their sales and operational processes. Therefore, a business plan may initially involve investing in more overheads to lay the necessary foundations for growth, and this is something that needs to be identified and planned for before going to market.
A small business may also have been run by an owner-manager in an informal way. In such instances, we look to professionalise the business at the governance level by introducing comprehensive board packs and KPI reporting and, in most instances, we will look to appoint a non-executive Chairman to the board. Ultimately, the clear objective for investors is to work in partnership with an open, enfranchised and ambitious management team to realise the full potential of the business.
Introducing private equity into a business can have a major impact, especially during the early stages. It can certainly be challenging but once everyone is on board, the journey can be hugely enjoyable and rewarding.
At WestBridge, we are keen to hear from ambitious management teams that require development capital, acquisition funding or support for management buyouts. If you would like to hear more about our investment criteria or discuss a particular opportunity, please do get in touch.