Investing in SMEs in 2019
The general consensus for Q1 2019 is that investment from the majority of the private equity sector backed off after the record highs of 2018. Not surprising, given the market uncertainty that has rippled from the UK across Europe due to Brexit and the trade dispute that lingers on between the world’s largest economies: the US and China.
Having enjoyed a successful career in manufacturing management (his CV includes Dana, Ametek and Sulzer), Leigh Smith, CEO of Venture Engineering Group, has spent the last twelve months on the acquisition and investment trail with manufacturing and engineering SME businesses.
I spent some time with Leigh recently to understand what makes a good investment in his opinion and he gave some sage advice about what to do and expect if you are looking to sell or attract investment.
What do you look at first when you are looking to make an investment?
“The key fundamentals for considering an investment or acquisition are the management team in place, the sustainability of the earnings and the vendor’s reason for selling. Other key criteria include the strategic fit of the business, geography and potential operational or commercial synergies.”
What can owners or leaders do to make their organisation more appealing?
“The owners or leaders can make their organisations more appealing by ensuring that the business is not entirely reliant on the key principal, who may be looking to leave shortly post-acquisition. Having a thought-through strategy for growth that stands up to critical examination also makes the business more desirable.”
What are the key factors you look at when deciphering the value of an organisation?
“The value is ultimately based on the risk and opportunity of the future cash-generating potential of the business. Any factor that influences this equation in a potentially positive or negative way will impact the consideration of value.”
How do you get owners and founders to separate emotion out from the processes?
“It is often the emotional energy of the founder or leader in the business that has enabled it to successfully grow. It is therefore a very emotional process to sell an entity that has been a major part of someone’s life, often for many decades. Being comfortable that the legacy of the business is protected and that the key stakeholders are in safe hands can help a vendor make the necessary transition.”
What does the process look like and how long might it take?
“It depends on whether the business for sale is being actively marketed or is responding to an unsolicited approach. There is typically a period of understanding each other and if the fit is right then usually the price and significant terms are captured in what is called a ‘Heads of Terms’ document. This is usually followed by a period of exclusivity, during which the investor/acquirer will seek to find out the critical information regarding the business by conducting ‘Due Diligence’ (DD). This will normally involve looking at commercial relationships, operational performance, financial reports and sometimes legal/HR issues.
“Following DD, if everyone is satisfied, the legal documents are negotiated, and the terms of the sale are captured in a legally binding ‘Sale and Purchase Agreement’. The whole process can be completed in a few weeks, but typically takes 3-6 months to complete.”
What is the one piece of advice you’d give anyone looking to sell their company?
“As with all negotiations, be clear what you are seeking to achieve, but be prepared to compromise to get a satisfactory outcome.”