A key part of the strategy for many PE portfolio companies is acquisitions. We caught up with three CFOs whose companies have made numerous acquisitions and find out what the process was like for them and what advice they would offer
Andy Insley is CFO of Cordium Group. Cordium (formerly The IMS Group) was acquired by Sovereign Capital in 2010, subsequently making 3 large and a number of smaller acquisitions over 5 years, to become one of the largest independent regulatory compliance consultancies in the world, with four times as many clients as at the time of Sovereign’s investment. In 2015 Sovereign sold the business to European Capital.
Paul Hawkes is Commercial Director (formerly CFO) of Westpoint Veterinary Group. Westpoint is the UK’s largest farm and production animal veterinary group providing a range of veterinary and support services to the UK livestock and food industries. August Equity acquired Westpoint in 2014 and the company has since made a number of acquisitions expanding its services in poultry, pigs and laboratory services.
David Burke is CFO of Citation. Operating throughout the UK since 1995, Citation provides professional advice and compliance packages to business clients. Citation was acquired by ECI Partners in 2012 and has made two substantial acquisitions during that time, BCAS and QMS.
How proactive are you are at looking for acquisition opportunities? How hands-on are your PE owners in assisting the search process?
Andy: We were very proactive in looking for acquisition opportunities from the point we were acquired by Sovereign and remain so now. Probably in the first 12 months it was a mixture of being led by management and Sovereign. After that most of the initiative was led by management as we had a very good understanding of the market. Whenever we were approached by CF houses with acquisition opportunities we had usually already looked at the company.
Paul: A majority of the opportunities have been self originated by the company. We have typically approached businesses rather than wait for opportunities to come to us, so that all have been off market. The companies are typically known to us and have expertise in areas that are relevant to our strategy. But it must also be a good fit with the wider group so it is important that management in a wider sense take the lead in the process.
David: It was part of the initial business plan to target acquisitions and ECI have worked very closely with us on this. Initially they had some ideas and they had the initial conversations with QMS. As a management team we are also aware of what is going on in the industry and opportunities are discussed on a regular basis.
Does the type of owner of a potential target influence your decision to acquire or not?
Andy: Not really. We look at the strategic fit of the company rather than who the owner is. However, it has generally been owner managed businesses that we have acquired.
Paul: For us it’s really about the quality of the business. It is important to be aware of the transaction risk that the ownership structure might present, and that should play a part in the consideration, but it shouldn’t be the main issue. It’s important to be aware of the pinch points and to know when not to proceed, and these might be impacted by the type of owner.
David: Not really. The main criteria is whether the company is a good fit – products, markets, culture. However, the ownership structure will impact the process and each will offer different challenges which can’t be ignored.
What level of detail/information did your PE Investors want from Management before giving 100% support to the acquisition?
Andy: The Investment case is key. It needs to include financial information, obviously, but also the strategic fit and future opportunity, including synergies and cross selling opportunities. Sovereign were engaged throughout this process.
Paul: August are actively involved throughout the process, culminating in an investment paper which must be approved by their committee. But to be honest that is usually a formality, with all the key issues headed off prior to that point. The things they look for in a deal are pretty standard. So appropriate levels of legal and financial due diligence, the level of detail varying depending on the size. They need to see appropriately negotiated legal documents. They want to know key management are being brought along and are keen to do the deal. And in most cases they will visit the target company and meet management themselves. It’s not a formal process but we work closely with August throughout.
David: ECI have been heavily involved throughout the process on our two acquisitions. They have been very thorough and have taken a very active role during the due diligence processes and legals.
Has your PE Investor provided non-dilutive equity for acquisitions?
Andy: Yes, both with Sovereign and EC we were provided with an equity pot for acquisitions.
Paul: Yes, Westpoint was explicitly acquired as a buy and build opportunity so there were funds negotiated up front for bolt on acquisitions. That gives us confidence to proceed without feeling there are difficult discussions to be had.
David: Yes. They provided additional non dilutive loan notes for the BCAS acquisition, and QMS was funded via bank debt.
How easy was it to move from identifying a target to reaching a heads of terms?
Andy: It really depends on each target, but this is the most difficult part of the process. It is all about relationships, particularly if the target is owner managed. This is why management need to take a more active role in this part of the process as owners tend to respond better to management rather than to a private equity house. The time can vary enormously depending on the situation of the target, and it can be years rather than months. I would say that 50% of the businesses we have properly targeted have moved to heads.
Paul: All of our acquisitions were off market, so in some cases the early conversations needed to sow the seed. That said we tried to establish the parameters early on in the discussions, and it did allow us to take the lead in the process. We have had quite a good success record in turning opportunities into heads of terms, and we have a fairly standard set of heads which means we try not to have to get into legal redrafting at this stage of a process.
David: With BCAS the process was quite quick, but with QMS this was a more drawn out process largely due to the private vendor we were dealing with. We had to work closely with him to bring him along with the deal.
And what about from heads to completion?
Andy: Typically 2-3 months, but depends on ownership. Corporate acquisitions tend to be quicker and more formulaic. With owner managed businesses, you are always vulnerable to personal issues which have to be managed as well.
Paul: We have a fairly standard format for our heads which we try to stick with, so we usually find we can move to completion quite quickly, typically I would say 8 weeks. Getting to heads is the more variable part, but after this everyone is keen to get the deal done.
David: Our two acquisitions proceeded quite differently. BCAS took a couple of months, with QMS the process was much longer with the seller unsure of whether he actually wanted to sell or not. It is difficult for an owner to sell something they have built, and this needs to be taken into consideration during the process and managed carefully. We had a number of occasions when we thought the deal was off.
Were the key management retained or not? Did you share equity with the target management?
Andy: Yes in most cases we retained some or all of the management of the target, and in most cases we did incentivise them with equity.
Paul: We are a service business, so it is critical for us that management and key employees are involved for a good period of time post the acquisition. It is important that this is established operationally rather than relying on restrictive covenants, so needs to be a positive for all parties. We want our new businesses to be engaged and motivated as part of Westpoint. Often this is a relief as it allows them to go back to enjoying their work as a vet, while Westpoint take over all the admin functions involved in running a business.
David: Initially we did retain key management in both the acquisitions, but things didn’t develop as expected. With BCAS the initial intention was to leave it to run as a standalone business, but this approach changed post acquisition and we proceeded to integrate it with the existing business which meant the management structure went. There was a handover period with the outgoing FD. With QMS the key management were retained after the deal, but the MD left soon after and we are in the process of replacing him.
What issues did you face with access to information from the target, in particular financial information?
Andy: Again this depends on the circumstances and size of the target. For smaller businesses, the level of information required by a PE house is far in excess of anything they track or generate on a monthly basis. So the process of gathering that information can be quite onerous for us as the acquirer as well as the target. It is rarely a lack of willingness on their part, just a question of resources and skills. This is one of the reasons why we have worked with Liberty in the past to assist with this part of the process.
Paul: Information generally depends on the scale and size of the business. Obviously for smaller business the information tends to be less available. Often the businesses we target are not involved in a process, so they do not have information prepared. Nevertheless there has been so much activity in our space that businesses tend to understand what is needed of them and are cooperative. We do try and do some legwork for them and are used to dealing with raw data which we can then manipulate in whatever way we need.
David: With BCAS we did have good financial information. Not all of it was reported in a formal sense, but the systems were fairly good. With QMS, as with many owner managed businesses, the financial information was less developed. It was managed largely on a cash basis. So we had to do quite a bit of work to build up detailed accounts, KPIs and forecasts before we could start due diligence, which Liberty assisted us with.
How did the integration go and were there any issues with culture?
Andy: Integration from an operational level happens quite quickly. Cultural integration takes some time and inevitably involves some staff turnover before things settle down. New staff tend to settle more quickly in the new group. Ultimately we do our best to make the transition as easy as possible for newly acquired staff, but in some cases it does come down to the individuals.
Paul: There has definitely been a difference between expectation and experience. We have acquired successful businesses, so they didn’t require any major changes, and integration wasn’t really a big part of the initial plan. However, because we were acquiring successful business, they were keen to look for integration opportunities to improve performance, so it has to some extent been led by the acquired companies which has worked very well. We haven’t suffered any resistance, and the companies see the benefit for themselves and are actively seeking benefits for being part of a bigger group. In fact good individuals in some of our acquired business have played a much bigger role in the wider group than was envisaged.
David: With BCAS the cultural fit was difficult, and we decided to fully integrate the business with Citation. BCAS was c100 staff at the time so it was a not insignificant process. With QMS, c60 staff, so far the fit has been excellent. The staff seem really excited about the new opportunity and so far we feel very positive about it. The MD has left but with a new MD we hope this will help with the cultural transition.
How are your acquisitions performing under your ownership?
Andy: They are all going well. Although I would say that it depends on the type of acquisition as to how easy it is to track this over the medium term. For a standalone business, or a new overseas acquisition these can be measured discretely. But if you are to achieve synergies you need to integrate the businesses so the acquisition becomes part of the group. Its success is then dependent on everyone in the business.
Paul: So far all are performing very well. All were growing in their own right before we acquired them and have not dropped the ball post acquisition and are enjoying the benefits of being part of a wider group. For the group as a whole the diversification that we have achieved through acquisition has been beneficial in helping us manage ups and downs in the cycle and variations in performance on individual business lines.
David: BCAS is now fully integrated and embedded. We are now performing better than ever in new business growth, so that’s a good result. With QMS it’s really too early to say. We have seen some cross selling which was a major driver for the acquisition. We have replaced the MD so we hope to be able to really push the business on from here.
What advice would you give to other CFOs for those critical first few months post acquisition?
Andy: It is key to take time to get to know the business you have acquired, getting under the skin, really understanding the operations and building trust with the new staff. I think trying to make any changes too quickly risks losing all the benefits, so my advice would be to make any decisions on an inclusive basis and work together with the new team.
Paul: For a business like ours the most important thing is to get the ongoing working relationships right from the outset. The transaction is not the end of the process it is just the start and it is important from the very early conversations that the longer term game is what it is all about, and that any difficulties during the transaction don’t adversely impact that. Establishing that trust early on makes conversations much easier as the business develops. Also it is important that the teams transition from planning to delivery quickly after the transaction. Although everyone is tired, it’s important to invest even more time just after completion to make sure the business can kick on from day 1. Get off to a quick start and don’t let the motivation levels fall.
David: It’s important to work closely with the target management team and really start to get under the skin of the business and really understand the culture – the real day to day stuff that the DD didn’t tell you. And if you find you have the wrong people don’t be afraid to change them sooner rather than later. Invariably they will also feel that they are in the wrong place in the new company. There is a small worry about loss of knowledge, but this can be managed and it is better to get the team right sooner rather than later so the business can settle.
You have used third party help during some of your acquisition processes, what do you feel are the pros and cons of outsourcing some of the work?
Andy: I think the pros are very apparent, especially with owner managed businesses. Liberty helped us gather data, run the analysis, and they also helped the target companies manage the workload of gathering all the information required. Liberty also helped us through the process keeping everyone moving forward and informed. There aren’t really any “cons” but I have to admit I was initially sceptical about what Liberty could bring. But over time you build trust and they became a good partner to help with other parts of the process. I would definitely use them again, and would advise any CFO to get some external support during an acquisition process.
Paul: We are still a relatively slender team, so the pace of change means we need to seek external help to deliver. Particularly when a PE owner wants to see professionally presented information and due diligence. On the downside there is a danger that the management team distance themselves from the detail. But this is just a case of working with the right people and clearly defining the roles and who is leading what. You also have to be mindful of cost, and again this is where it is important to define roles and responsibilities so the transaction can be delivered at a sensible cost.
David: The pros are that external advisors give you the scale to drive through an acquisition. They add resource to your team when you need it, and bring in knowledge and a skillset that is very hard to recruit. The con is that management are perhaps not be as close to the deal as they might want to be.