|Deal completed in:||14 months|
The business is a highly established environmental engineering company specialising in the removal and management of asbestos as well as providing a wide range of light civil engineering services. It has an extremely impressive blue chip client base including being a first tier supplier to the National Grid but also a whole range of large scale clients from both the public and private sectors including a range of City councils in the North of England, Royal Mail and HS2.
The business is highly accredited and as a result wins the majority of tenders it bids for but is highly selective about tendering, pursuing only those that meet their criteria in terms of location and resource requirement. The result is an exemplary level of net profitability for a company in the engineering or construction sectors.
The business was structured as an LLP was owned by a husband and wife team who were approaching retirement age and wished to plan a medium term exit from the business. The Commercial Director of the business was also beyond retirement age and wished to retire upon the sale of the business and this particular individual who had been with the company for 10 years, had been very instrumental in the recent successes of the business and had done much to create the business framework as it now was.
The vendors did not perceive that the Senior Management Team of the business would have the capability or desire to become involved in a management buyout so this was never actively discussed.
Hornblower were recommended to the vendors through professional contacts who had worked with us previously and we entered into dialogue with the vendors in late 2014.
What we did
As a result of the initial dialogue and preliminary audit of the business that Hornblower undertook, we flagged up a series of key issues that were likely to affect the saleability of the business:
- The desire of the vendors and particularly the Commercial Director to leave upon the sale of the business ideally with very little handover period was inevitably going to be seen as a key risk by any acquirer even though there was a succession plan in place.
- The exemplary level of profitability from the business although very attractive from a potential investment perspective, was likely going to deter other potential trade buyers from attempting to acquire the company due to potential affordability.
- The vendors had managed to build the business to a significant level of turnover which was consistently in excess of £7m per annum, whilst maintaining a very positive and open ‘family’ type culture throughout the company. We were concerned that this may come across to buyers as a lack of professional discipline particularly as the vendors had also underinvested in some part of the business like financial reporting systems and some necessary hardware.
In light of the above our overall conclusion was that the vendors’ exit would more likely be realised by attracting Private Equity investment rather than it being a trade sale. We therefore devised and agreed a two stage approach with the Vendors to qualify our views and this is outlined below.
Stage 1 – over a two month period we:
- Carried out a detailed Valuation of the business to get to the true underlying level of profitability within the business. This was more complex than normal due to the multi-tiered LLP structure within the business.
- Made a more qualified assessment of the internal systems within the business but also agreed with the vendors that we could inform the Senior Management Team of the intended sale of the business and begin to assess their capability as a management team through open dialogue with them.
- Made some discreet trade enquiries under Non-Disclosure Agreement to test the saleability of the business to larger trade organisations within the same industry space, and other multi-disciplinary engineering and construction groups.
- Summarised our conclusions which were broadly as we originally thought, that the vendors exit from the business would be most likely realised through equity investment rather than a trade sale. The significant bonus from the work we carried out in Stage 1 was that the Senior Management team of the 3 top executives proved themselves to be a completely capable outright leadership team so the possibility of them leading a management buyout which would more readily attract equity investment, became a very realistic possibility.
Stage 2 – Having agreed our suggested approach going forward with the vendors we:
- Agreed with the management team who would take the role of MD in the event of a management buyout.
- Coached the Senior Management in the writing of a business plan and 5 year forecast.
- Agreed a new management accounting framework with the company accountants whereby EBITDA adjustments were reported monthly so there was clarity on underlying profitability on a monthly and year to date basis.
- Once the above were in place and having created a list of target potential private equity investors that had made previous investments in the industrial and engineering sectors, we started making direct approaches to these target investors. The response was generally good and we were soon into a cycle of meetings with a group of different interested investment firms which included presentations of the business plan and forecast by the management team.
- We secured three offers for the business which were all in the region of value required by the vendors so we then set about negotiating the best offer and also qualifying who we and the management team thought would be the best investment partners for the future of the company.
- In May 2015 a deal was agreed and Heads of Terms were agreed with a private equity firm.
- The PE firm agreed to co-invest with another investment firm and both parties proceeded to undertake extensive commercial, legal and financial due diligence.
- Throughout the due diligence and contractual stages Hornblower continued to act as overall transaction managers and as well as managing on-going issues as they came up between the investors and vendors, we also worked closely with the vendors lawyers and accountants to ensure all due diligence matters were satisfied and that the process kept moving.
- The contractual and due diligence stage took somewhat longer than normal mainly because the new investors committed to converting the previous LLP structure into one single Limited company vehicle at completion which was a complex exercise.
- The transaction was completed in October 2015.
The buyers have acquired a very profitable and sustainable business, with a strong management team in place and with real growth prospects. The senior management team have the opportunity to be a part of the growth and are well incentivised. The vendors have realised a very good value for the business and are able to retire.
SOLD – October 2015