HMT Partner Paul Read recently hosted a live webinar on the deal value issues faced within private equity transactions from both the buyer & seller’s perspectives. Paul was joined by two expert panellists during the session:
- Julian Carr – Founder & Partner at Ethos Partners – a private investment office set up by private equity professionals to invest their own capital alongside sophisticated, high net worth investors into quality, smaller private equity transactions; and
- Graeme Scott – Experienced CFO of PE backed businesses, who held a CFO role at two LDC backed businesses in past 8 years, Property Software Group, who were sold to Zoopla, and CIPHR Group, which undertook a secondary buyout in 2020 backed by ECI Partners.
Paul and the panellists shared their experiences and deal stories on three main topics: The impact of Covid-19 in transactions, sustainability of EBITDA and net debt and net working capital.
Below are the main takeaways from the session.
- Upfront preparation for both buyers and sellers is key to ensuring a smooth process, and avoiding any potential disputes later in the process, which could have been agreed upfront.
- Accordingly, it is important for both buyers and sellers to have experienced advisors, who can help them through the process, and ensure that all points have been considered.
The impact of Covid-19 on private equity transactions
- Covid-19 and its consequences, such as workforce shortage and increase in goods transportation costs, have impacted portfolio companies.
- Private equity firms continued to pay high multiples for businesses, but in some cases have held back a portion of the consideration to be released the following year, due to the uncertainty surrounding Covid-19. This is thought to be a temporary measure.
- Deal time frames have been condensed during Covid-19, aided by the use of video conferencing, online signatures, etc.
The disparity between Net Debt and Normalised Working Capital
- From a private equity buyer’s viewpoint, it is important to factor any known net debt and normalised working capital adjustments into their bids, to help avoid any disputes later in the process.
- From a seller’s perspective, it is key to calculate what they expect these adjustments to be upfront, so that they go into the transaction knowing what any potential adjustments could be.
- Sellers typically have the advantage in negotiating net debt and normalised working capital, as they have the data to hand to calculate various scenarios and select those most favourable to themselves.
- Where possible, adjustments should be discussed at the heads of terms stage, to ensure a smooth process and any future disputes, albeit this is not always possible.
- EBITDA is not always the right metric, there are many more factors to take into consideration (such as any maintenance capex required).
- Buyers should think about the long-term vision for the business, as EBITDA will likely reduce in the short terms post transaction, as additional costs are introduced to support the growth of the business.
The key points for businesses looking to sell in the next 12-18 months are:
- Ensuring that there is as much certainty over future revenues as possible, including considering extending existing contracts where possible.
- Being able to positively explain any customer churn; and
- Have a view on the current run-rate EBITDA of the Business (rather than simply presenting the last twelve-month performance).
If you would like to receive a link to the recording of the full webinar session or if you are considering entering an acquisition, disposal or fundraising process please contact our team who would be delighted to help on 01491579740.