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Seven things to expect when selling your LSP to private equity
9th November 2018
#Content & Analytics
Many language agencies are turning to ready PE capital to support growth – what impact will it have on your business? Private equity funding continues to make steady advances into the language services domain, with an increasing number of LSPs leveraging investor capital and expertise to springboard their agencies to the next level of growth (Frontier Capital’s exit of IP translation specialist MultiLing is the latest public success story). Unlike sale to a trade buyer, however, selling to a PE firm rarely involves an immediate exit from the business and is likely to be a two-stage process that calls for significant ongoing involvement from the owner. PE companies typically look to acquire a controlling or majority share of the business they are investing in, and work to provide resources that enable the company to pursue market opportunity that was previously out of reach. When things go positively, PE investment can mean phenomenal results for business owners – but it’s a special type of partnership that has to be carefully constructed. As an LSP owner considering growth options, what should you expect if you partner with a private equity group? 1. More money to grow The primary asset that PE groups bring to the table is deep pockets that let business owners accelerate their growth trajectory and increase shareholder value. This may take the form of investment in sales, marketing or technology, or may – as is the case with LanguageWire’s recent acquisition of Xplanation – include expansion through M&A. Be ready, however, to justify every penny. PE partners aren’t spending out of their own personal piggybanks, but are beholden to investors in a fund which provides the capital used for their projects. So while a PE partner may offer access to big sums for investment in growth, the ROI of each decision will be carefully scrutinized to calculate the anticipated return. 2. No place to hide Just as investment decisions will be analyzed in detail, so will every aspect of business operations. Costs, personnel, customer base – even the performance of the incumbent CEO. Some business owners thrive on this new pressure to deliver results, as privately-owned companies often lack a driving force to spur on aggressive growth beyond the personal ambition of the founder. A new group of motivated shareholders certainly provides this impetus, but business owners need to enter the deal with their eyes open and understand that the PE group’s primary objective is to deliver the best possible return on their investment. When faced with obstacles or indicators that they are falling short of forecasts, they won’t hesitate to act. In worst-case scenarios, this can mean layoffs, office closures or other big changes which can impact and potentially damage company culture. 3. A new business partner Often among the biggest adjustments business owners have to make in selling to PE groups is no longer being in full control of their organization. For founders who have run companies for ten or twenty years, to be bumped down to a minority partner can feel strange, even if the upside potential this creates is greater than anything they could have achieved independently (as is often the case). In real terms, accessing that upside means no more solo decision-making and needing to get along well with a new group of senior business partners. This doesn’t mean, however, that PE firms will be getting under the wheels of management on a daily basis – they are investors, not operators, and though they add experience, financial expertise and ideas, they will not be involved in daily functions and will leave management to do its job. 4. An easier sale process ‘Easy’ is a relative term in all cases, but there’s truth in the idea that selling to private equity groups can be a more straightforward process than selling to a trade or strategic buyer. PE groups have a mandate to acquire companies, often within a fixed time period (the expiration lifetime of the fund), and need to buy, grow and exit companies within that span in order to provide investor returns. As funds are spread across a portfolio of investments, PE groups accept a certain degree of risk in their work, also. With other buyer categories (for example private sale), it’s likely that a large percentage of the buyer’s personal net worth may be invested in the deal, or that they have a realistic option to simply pull out of the idea of making an acquisition altogether. This can lead to a slower, more ponderous process (often less well structured), which can be draining for the seller and a distraction for the business, especially if it doesn’t result in a deal. 5. A new perspective As mentioned, PE groups are not ‘operators’ who will be working actively inside the companies they acquire. In fact, many PE partners have never done anything even resembling the type of work which founders (or 99% of their employees) do on a day-to-day basis. Instead, they bring a different set of skills. Often armed with MBAs and the holders of multiple advanced business and financial certifications, PE professionals are seldom entrepreneurs and perhaps more accurately labelled professional investors. While they may not join you in putting their shoulders to the wheel, they will be highly adept at studying business data, finances and performance reports, spotting opportunities for efficiencies, expansion and guiding where investment capital should best be deployed. In the best partnerships, the analytical skills of the PE team coupled with the market knowledge of management creates a powerful team. 6. A fixed exit timeline A significant degree of control that founders give up when selling to PE firms is the ability to dictate time-frames when it comes to exiting the company fully. Although a business owner already takes some chips off the table when selling their initial share to the PE firm to begin with, they are usually then locked in to executing on a growth and exit strategy which will enable the PE to deliver returns to fund investors. With most funds having a life-cycle of 5 to 7 years, this arrangement strips founders of the flexibility to run their companies for a long (or as little) as they wish, as the PE firm will look to sell their investment on for a profit during that window. 7. A new set of stakeholders On an emotional level, some founders take some time to get used to the idea that their company - often built up with sweat, grit, late nights and plenty of risky moments – has become a vehicle for investment in a larger series of business partnerships. PE groups create their funds with money from wealthy individuals, pension plans, insurance companies and other investors looking to generate a return on their capital, and knowing that these unknown parties are ultimately the ones driving the decision-making within a business can be hard to process. With that said, many founders are able to retain significant degrees of both cultural and creative control of their companies after selling to PE partners, and think of outside investor involvement as simply fuel to power their growth of their company. While they may no longer own a controlling share, they remain the de facto business leader and can achieve personal wealth by leveraging investor funds that far exceeds anything attainable on their own. *** Adaptive M&A works with the owners of translation and localization agencies to maximize shareholder value at exit by identifying the right strategic match from a diverse network of buyers and investors. You can learn more about our services here. Please feel free to contact me at txema.clifford@adaptive-ma.com if you require assistance on the above.
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Is Your Translation Agency Ready For Investment?
21st June 2018
#MA
An injection of outside capital is a pivotal moment for business growth – but how do you know when the time is right? For self-funded LSPs who have developed step by step as cashflow allows, investment can unlock the potential to scale rapidly and push the organization to the next level. It can also bring on board valuable strategic experience from investment partners, and position the founder for an eventual exit at a significantly higher valuation than would be possible without this boost. We look at how business owners can know when the time is right to take this step. Preparing a business for outside investment isn’t just a necessary step for actually securing the funding, it’s a highly valuable exercise in its own right. It’s not unusual for language services agency owners to uncover things during the process that help them understand the work that is necessary before the company will be ready to accept outside capital. Whether you are actively considering funding or benchmarking how your business is currently running, here are some important checklist items to help you gauge how you rank: 1) Do you have a defined strategy? A business strategy should help potential investors to understand the precise problem your business is solving and for which customers. In the LSP space, this is as much about what your company isn’t as it is about what it is. One the global issue of communication has been presented (i.e. helping end clients overcome language barriers in business), investors will need to know exactly where your company fits into the spectrum of technology and service offerings available to buyers of language solutions. A strategy should give investors detailed insight into topics such as brand identity, product/service differentiators, pricing, target vertical markets, workflow and technology integration, together with an awareness of competition and general market conditions. Critically, your strategy should illustrate how value will be created and realised for all shareholders. 2) Do you have detailed growth forecasts? Growth forecasts show investors exactly how their money is put to work. Not only are investors interested in how fast and how far you believe you can grow with their input, they’re anxious to see how your company’s past performance data links into future growth models to substantiate projections. This means you need to lead potential investors carefully through the rationale for arriving at the numbers you do when building your model, and help them achieve a sense of confidence that your forecasts are founded on a steady base of supporting data – not cheerful optimism alone. 3) Is your team ready? This can be easily overlooked as the number-crunching takes priority, but high on any investor’s own qualifying checklist is the leadership team of the company they’re reviewing. A hard-working and charismatic founder is a definite plus, but everybody runs out of bandwidth at some stage, and investors will be wary of a business that depends on the current manager making all of the major decisions or pulling all the strings. Not only should the company’s core competency areas such as sales, marketing, production and IT be covered by a capable team, investors should have confidence that the team is committed to the company’s long-term growth and success. 4) Does your plan have gaps? At its most basic level, an investor’s appraisal of whether to commit capital to a new enterprise will rest on how clearly the business plan illustrates every step of the growth journey. This means showing investors that there is nothing (or at least very little) in your plan that is based on supposition or speculation. Business plans which depend heavily on growth from creation of new services or penetration of new markets can be less compelling than those which offer a clear and progressive path to scale through expansion of existing strategy. * * * Adaptive M&A works with both passive and active sellers in the translation and localization industry, helping them explore market opportunities and connect with well-matched buyers for their language agencies. You can learn more about Adaptive M&A’s services for sellers here. If you require any assistance on the points mentioned above, please feel free to contact me at: txema.clifford@adaptive-ma.com
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Serving up some good with Tunbridge Wells Street Teams
1st May 2018
#Charity
Let’s Get Charitable! The Adaptive Business Group UK has been looking for a suitable charity activity for a while, importantly, one to which we can make an ongoing commitment. On Thursday, April 12th, seven of Adaptive’s workforce became a part of ‘Tunbridge Wells Street Teams’ – a dedicated group which has been in operation for more than 20 years providing hot meals and support to the homeless and hungry of the town every night of the week. We wanted to take the load off them, considering the impressive amount of effort and good work they provide for those in need. Adaptive’s team took to the task seriously, using the kitchen at a local rugby club (Tunbridge Wells RFC) to prepare the meal, which took the form of a giant spaghetti bolognese. Having never prepared a meal for (give or take) 30 people, we put our heads together and had to strategise. There were key contributors throughout the team in a mesmeric display of unity: ‘Head Chef’ Michael Radwan – who provided the culinary expertise, being a dab hand in the kitchen ‘Dark Horse’ Txema Clifford – battled with and eventually succeeded in the mass-boiling of pasta ‘Chief Enthusiast’ Gery Persand – gave everyone the needed boost to get the job done whilst chopping vigorously ‘Problem Solver’ Mike Thompsett – managed to figure out how to fire up both the hob and oven, a task too difficult for other team members ‘Elbow Grease’ Edmund Blogg – scrubbed the kitchen like no one before him (also provided beverages) ‘Star Man’ Adam Nevrala – never has anyone mixed ingredients so vigorously or enjoyed it so much ‘COO’ Owain Withers – masterful delegator and brains behind the organisation Special Mentions Owain’s mother Anna for providing a delightful apple crumble which may have proved a step too far – the Adaptive team eventually had to take on the responsibility of finishing it on themselves. Generous Doug Gill donated multiple pairs of ripped jeans that company policy will not permit him to wear. Whilst we had our fun cooking, creating and helping out, it was also a very sobering experience - Tunbridge Wells is a very popular area for the homeless and we met some people who have fallen on very difficult times that reminded us of the fortunate lives we lead. This is certainly something we will continue to support moving forward and we intend to make this a monthly occurrence. You can find out more and even offer a donation to Tunbridge Wells Street Teams here.
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Riding the tide - when is the right time to sell your services business?
9th April 2018
#M&A
Business owners sell their companies for a multitude of reasons, both personal and professional. Selling a company can be a tough process, and the steps involved can be both expensive and a distraction from daily operations. The process can also be an emotional one, as many entrepreneurs in the SME bracket will only sell a couple of companies during their careers, perhaps only one. With so much at stake, the question this article poses is when is the right time to sell? For most business owners, timing is the hardest part of the sale process to analyze. In terms of valuation, for many services industries the governing factors are relatively straightforward – typically based on profitability, location, revenue growth, balanced customer base, vertical market specialism and any relevant technology or branding differentiators. For those who know their markets and have strong visibility across the commercial landscape, identifying a potential buyer is likely not the most challenging aspect of the sale process either. Smart sellers seek a strategic match where the acquisition adds value to the buyer through diversification, technology, niche-market expertise or regional presence. What is often less clear to owners of small and medium businesses is timing – when to sell their business to achieve maximum valuation, secure the right strategic fit and avoid downtime on a false start. The balancing act performed by entrepreneurs involves acknowledging that the optimal moment to sell all or part of their company can be the very same moment when it appears there is every reason to retain full ownership – when wind is in the sales, revenues are climbing, new customers are rolling in month on month and the business has ample potential to move into new markets. Owners without a clear exit strategy risk falling into the trap of waiting for an undefined “right moment in the future” to sell their business, and may focus their energies on building towards this goal. For many this can mean a vision of a company with stable, consistent EBITDA which has acted on every easily visible market opportunity for expansion and diversification. In the eyes of a buyer, however, these elements do not always signal a great deal. If a seller is over cautious in waiting for the stars to align, this can portray a company that has lost its dynamism and future potential to an investor. A business can shift from an exciting asset to a bolt-on acquisition appealing to a limited pool of buyers, with forecasted ROI based on maintaining performance rather than continuing to innovate and grow at a fast pace. According to Crispin Pike, who sold his IT security business, Sysec, to Herjavec Group, “your business should be on the up when you offer it for sale, with growing profits, reinvestment, employment opportunities and new markets, geographies or product lines” (Telegraph). Ironically this may seem like the ideal moment to remain at the helm of the company, but for others it can be the ideal moment to sell. A surge of forward momentum and readily accessible future opportunity can excite investors more than a tried-and-tested balance sheet with no evident signs of a future uptick in performance. The right timing and sale scenario is always going to be a complicated decision for any seller, but some things that help give a better chance of capitalizing on the golden moment include: defining exit goals, listening to the market & talking to advisors. An exit strategy with goals is key - running a company knowing that the owner will want to sell it “one day” can mean that lucrative scenarios pass by them continuously and they are unaware. If a business owner’s goal is retiring with funds to finance a lifestyle, then this helps quantify the goal and identify when this might be achievable. Younger owners may wish to sell a portion of their equity to a larger buyer or a PE group and join an executive management team with a view to a second exit. Being aware of what an owner wants, be it liquidity or future upside, is invaluable in helping them run their company and shape it towards an ideal acquisition scenario. Business owners are also well advised to continually listen to the market and evaluate if M&A activity in their space is gathering pace or cooling off, and to track valuation multiples where publicized. These indicators can signal to an entrepreneur that it might be a good moment to re-evaluate their current exit time-frame. Many SME owners ignore obvious signals that buyers are active in their space because they are working towards their balance-sheet-driven future moment when they will be “ready” for sale. In some cases the market dictates the driving force behind acquisitions more than owner plans. Entrepreneurs can miss the boat by waiting too long, with buyer’s appetites and PE investment slowing down. Keeping open channels of dialogue is also essential for the process, as third parties and consultants can help provide some guidance and expertise within fragmented markets where public M&A data is less available. As long as conversations with prospective buyers, advisers and investors are always managed on clear terms, business owners can build valuable networks and relationships and position themselves to stand strong chances of achieving their goals.
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