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3rd June 2008
CAT.130
Birmingham Post (Management Buyouts)
Ray Harris, Investment Director with Catapult Venture Managers, provides an insight into the benefits of a business having a private equity investor on board and how the advantages go beyond the actual funding itself.
Private equity funding has been a springboard for thousands of successful UK companies and is undoubtedly a vital wealth catalyst for the economy.
Since 1983 the UK private equity industry has invested more than £80 billion - £60 billion in the UK – in around 30,000 companies, but it’s not just a question of investment levels that make our industry’s contribution so important. Next time you talk to a VC, ask them what else, apart from the money, they can bring.
Sometimes additional skills and experience need to be brought into a team in order to help the growth of the business towards a goal of, ultimately, improving the returns of the owners. In such cases, Catapult has a database of non-executive directors from which we can introduce a suitable candidate. Such individuals can help guide the company to the next stage of development or perhaps open new doors of opportunity through an extensive network of contacts.
However, for some management teams there is an unfounded fear that a non-executive director - introduced by a private equity investor - is in fact a ‘spy’ in the camp.
‘Adding-value’
However, nothing could be further from the truth. Such a role is designed to ‘add value’ to the management team and the non-executive, as part of his or her remit, acts as a buffer between management and the investor.
Once on board, the skills and attributes that the selected non-executive brings to the table should ensure the perceived threat metaphorically evaporates into the ether. If they don’t, the non-executive has not done their job properly.
A good non-executive will not only provide guidance and assistance to the management team where needed, but act as a “sounding board” for the development of the business. It is vital that such an individual is sufficiently close to the team to know what the issues and opportunities are. However, this relationship needs to be managed in such a way that the non-executive can stand back and take an objective view of what is happening within the business and put in place the strategies that are needed to take it forward.
An excellent example of how a non-executive can perform such a role can be found at Kingswinford-based Practice Management Services Limited – formerly Exmet Ltd – where we invested as part of a £600k round and introduced Dean Butler as a non-executive director. Dean, who was founder of Vision Express, brought his experience, contacts and commercial acumen to help speed up the growth of the business.
Very often small and medium-sized businesses don’t look at the big picture. One of the most common mistakes we come across among entrepreneurs is failing to seek any real financial support until they are forced to. Quite often this puts them in the situation that either they become desperate and have to accept the first deal put to them, or alternatively cannot secure funding at all. The old adage about “a bank will only ever lend you an umbrella when it is raining” is probably truer than ever now. Businesses should use their current success as a magnet for VC funding, not a reason to hope they can survive without it.
An effective non-exec chairman will know at which point a business will need to
look for additional funding. This requires an evaluation of just how much money is available to fund the ongoing running and development of the business. All too often, management teams don’t seek funding early enough – failing to recognise the length of time it may take to attract and put in place further investment.
For owner managers planning an exit, there are two main options available – either an MBO or a trade sale. Many fail to plan far enough in advance for the sale of their business. Ideally, this should be done two to three years ahead of their ideal time to sell and then work towards getting it in great shape prior to an MBO or trade sale, or bring someone in with enough time to settle in and take over their role.
A good non-exec chairman will be able to assess whether the current management team is capable of buying, or whether a successor needs to be brought in and groomed for the role over the next few years. Other gaps in expertise may also need to be identified and filled.
Identifying all of these ‘bumps’ in the journey is the job of the non-executive, however, good ones are hard to find. More often than not they are linked into VC houses and will only do deals where a VC is involved. This is because experienced non-executives know that a VC brings a certain professionalism and discipline to a business that allows them to work more effectively without a lot of the internal politics of a SME.
The bottom line is that a good business which is run by an effective management team will almost certainly attract funding providing that it is realistically priced!
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For further information please contact Ray Harris at Catapult Venture Managers on 0121 616 0180 or 07905 349742; or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322
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