As the telecoms industry continues to evolve and consolidate it creates greater opportunities in the mid-market for disposals, acquisitions and mergers. However, to maximise the potential of this market buoyancy it is vital for companies to build and demonstrate considerable value first. In other words, obsessing about an exit doesn’t always pay dividends.
A successful sale might be the ultimate objective for a company’s founders, but being overly focussed on the end game never constitutes a business strategy per se.
According to a recent survey by private bank Coutts, just four out of ten entrepreneurs (43%) believed they needed to plan for an exit at every stage of their company’s growth whilst the vast majority of seasoned sellers (81%) prioritised building value in the business above all else. During a company’s growth phase the focus on creating value by constructing something compelling or unique is critical to eventually finding a buyer.
So how should it be done?
1) Find a niche
Many successful companies in the TMT space are niche players. They often have the probability of stronger margins, a tendency to become profitable sooner and the presence of greater barriers to entry for their competitors. Niche market leaders incline toward higher overall profitability and this can reach between 25-30% for those with particular market dominance.
These organisations have a clearly defined vertical focus, strong USPs and may have enjoyed a first-mover advantage. In the telecoms mid-market where there are more homogenous propositions, it is more of a challenge to differentiate although the move away from calls and fixed lines towards unified communications and IT services has enabled defined propositions to occur.
Further differentiation can be gained by focussing on a particular vertical industry, such as education or local government, or even creating a focus on a particular geographical location. A niche or complementary proposition is often the catalyst for a sale.
AdEPT Technology Group snapped up Yorkshire-based IT services supplier ACS Group, an Evolution Capital client, earlier this year for that very reason. As a niche player in the education sector, ACS Group complemented AdEPT’s existing portfolio and the deal was expected to be earnings enhancing from completion.
2) Build a solid track record of financial success
It might sound obvious but nothing attracts a buyer more than building a healthy financial track record. Value is built from achieving a strong record of profitability, steady progress over a protracted period and robust balance sheet fundamentals. The better the cost controls and the steeper the profit line, the more value is created within an organisation. As the company continues on its growth curve, plans should include a steady and aggressive pay-down of debt, if any exists.
The benefits to the business of getting accurate management information, especially timely management accounts, cannot be underestimated because if the facts are not available any logic for sound judgement is removed. Ensuring your financial house is in order should be a fundamental qualification for any business owner with aspirations to grow and ultimately sell their organisation.
3) Secure the intangible assets
For many TMT companies, much of their value is in the intellectual property (IP) and from the outset, this needs to be protected. All businesses will, to a certain extent, either own or use IP under license and ownership or valid usage will need to be proven should a sale occur. The use of third party products will require a watertight contract to be in place – preferably an exclusive and irrevocable licence. The easiest way for a business to protect its proprietary innovations is to apply for an international patent as soon as possible.
Trade names and trademarks will also be subject to scrutiny, as will less obvious intangibles like the many flavours of URLs (.com, .co.uk, .org) which all contribute to the value of the company. Owners should be diligent about the legal maintenance of these intangibles and keep them registered, centralised and visible at all times.
One particularly important intangible asset is a company’s staff and it is in many of their employees, particularly the longest-serving key people, where much of the value lies. The training, mentoring and management of staff are a major investment, which needs to be protected, and incentive plans can be an important motivator.
As Virgin’s Richard Branson once said: “Train people well enough so they can leave, treat them well enough so they don’t want to.” A strong, long-lasting no-compete agreement for senior management should also be essential for key staff.
4) Plot the market size against its growth potential
Even for the most keenly focussed niche TMT player, if the potential market size is tiny, it will never become an attractive target for a buyer. A company with the lion’s share of a small and finite market will always be severely limited when it comes to its growth potential.
Business value can only be realised by knowing the current market share and the predicted market size and then factoring in future growth. A prudent management team should see the weaknesses in the road ahead and look for the possibilities to pivot into replacement segments in emerging new markets.
Alternatively where challenges arise through changing market conditions, such as the threat of Brexit, an evolutionary and flexible business model can be an important pillar upon which to build value. For example, in straightened financial times, the ability to provide customers with flexible payment options that will be reported as operational expenditure rather than large capital investments can help turn threats into opportunities. Crystal balls are always in short supply but wherever possible owners should strive to position their enterprise for the future to enhance its value.
As Steve Jobs, founder of Apple, famously said: “Let’s go invent tomorrow rather than worrying about what happened yesterday.”
5) Keep the housekeeping spotless
From the outset, it is essential to initiate a regime of best practice when it comes to good housekeeping. It takes various forms but an important spoke in the wheel is maintaining scrupulously clean and audited financial records. Equally important is strict adherence to HMRC’s tax system, so that the business has a defensible tax position and that there is nothing risky that might provide a barrier to exit at a later stage.
A simple transactions such as acquiring real estate, allotting shares and options schemes ideally need to be scrutinised by tax experts at their inception to ensure that they have been correctly dealt with. Share registers need to be regularly managed and maintained to ensure they are correct and up-to-date.
When the time comes to dispose of the business any buyer paying the market price will probably expect the seller to make warranties and representations about the enterprise being sold. They will also expect fairly disclosed known threats and claims as part of the due diligence process and will doubtless need an attestation that the buyer has been truthful and not misled the buyer intentionally. If a company’s housekeeping is good it will make this process a great deal more transparent and easier.
There is plenty of evidence to suggest that sellers find it (almost) impossible to control the timing of their sale. However, by building value into the company from inception, it is possible to hedge against most show-stoppers many years later. Owners can never get enough good advice on this subject from the outset.