Seven commandments for UK tech CEOs

Setting the stage for Your First Private Equity Deal: Insider Insights CEO Working Breakfast - 18th September

So you have run your business for long enough and to the required level of success to consider bringing in a private equity investor. By definition you are a successful CEO. So it therefore follows that as a smart person, navigating your way through a private equity deal can’t be that hard, right? Plenty of first timer CEOs do it. Wrong. I have lost count of the number of conversations with founders that included the phrase, “if only I’d known what I know now before I did my first private equity deal!”.

Executing a successful private equity transaction is intricate and complex and, here’s the rub, there is almost no overlap between the knowledge, experience and relationships you have acquired, honed and curated in running a successful technology company.

Finding the right investor, structuring the right deal, and then understanding what to expect with a new investor on board is difficult in itself, and requires a completely different network of relationships.

The potential upside of getting it right?

Accelerated growth in your business and enhanced wealth creation for you and your team.? But the opposite is also true. I am constantly amazed at the relative frequency with which founders and CEOs fall out with their private equity investor and, soberingly, even when the company is achieving its plan.

So from our unique perspective at Megabuyte, where we engage with the boards of over 500+ UK tech companies a year, I thought it would be helpful to share my thoughts on the seven key elements I have observed that CEOs need to master for their first private equity deal – or indeed any private equity deal.

And if this piques your interest, we will discuss these points, and I’m sure many other besides, at a Megabuyte Working Breakfast event on 18th September - Your First Private Equity Deal: Insider Insights.

The event will include ‘TED’ talks from three speakers with different perspectives on this important topic. Ben Goss , Founder and CEO of wealth management software vendor Dynamic Planner will give the founder’s perspective, having completed an investment round with FPE in 2022. Guy Warren , CEO of ITRS will give the professional CEO perspective having taken his company through two private equity transactions following an MBO previously. And last, but most definitely not least, we will hear from Mark Rogerson MBE , plural PE Chair at companies including Totalmobile Ltd , Eque2 Ltd , and Tax Systems .

Tech companies that are Megabuyte subscribers have access to this event as part of their subscription and can RSVP here. We always reserve a number of complimentary seats for CEOs who are not yet Megabuyte subscribers so if you are interested in joining us please drop me a message.

So let’s dive into my seven tips for a successful private equity transaction

1. Ask the dumb questions up front

I have one overarching and crucial piece of advice: ask the seemingly simple questions upfront. As I mentioned earlier, running a successful tech business doesn’t automatically equip you with knowledge about a private equity process. However, I often find CEOs surprisingly hesitant to do this, possibly due to concerns about appearing weak to their senior leadership team at such a critical time. I recall encountering the same hesitation when I worked in the City with companies preparing for IPOs, which is arguably an even more complex process.

So, my strong advice is to leverage your network, seek free advice from advisers even before you select one, and understand as much as possible upfront about the questions below. Do this even before discussing a potential ‘event’ with your team.

There is also a broader point to consider. Adopt a scientific approach to this process and strive to be in control of your own destiny by gathering your own information. Validate important decisions with people in your network and advisers whom you know to be truly independent.

2. Start early to understand your objectives and valuation drivers

As with any corporate transaction, early planning is essential. In my opinion, this should start at least two years before you anticipate being ready. As part of this initial planning phase, it is vital to understand your current valuation and, equally importantly, how to optimise it before the transaction.

Without this insight, individual shareholders will struggle to clearly define their personal objectives for any liquidity event. For example, some shareholders may wish to retire and are primarily focused on securing ‘beach money’ from the transaction. This will significantly influence whether they are willing to commit to the first private equity cycle.

More broadly, this exercise will determine whether a private equity round is the right path for the company to pursue. I recently led a board workshop where we had this very debate. The shareholders were focused on a private equity transaction, but our initial valuation analysis revealed that the company had not yet reached the necessary size for this to be a viable option.

Recognising that a trade sale in the short term would not meet their personal financial objectives, we are now assisting them with a growth strategy and value creation plan aimed at achieving a successful private equity event in two to three years. The key point is that without this upfront analysis, they might have progressed a long way down the track before realising they were too early for a successful private equity deal.

3. Spend time finding the right adviser

Your choice of adviser (yes, you do need one) is arguably almost as important as finding the right investor. Again, be scientific about this. Resist the temptation to pick your chairman’s mate from the golf club (that’s not a joke by the way – it happens all the time) or a similarly random selection method. Select your adviser in the same way you would run any business-critical procurement. In my view, the best time to get an adviser on board is immediately after you have your value creation plan in place.

As with any adviser selection, pick one where you are important to them but not too important and, most of all, pick one that has not only technology sector creds but experience of, and relationships with, your specific technology subsector. The last element is perhaps less important than it would be in a trade sale conversation, but then you may well want to run a dual track process (trade and private equity conversations simultaneously) anyway. As a subset of this point, also ensure that your adviser has geographical reach to relevant trade buyers and investors.

One final point on advisers. While a good adviser is worth its weight in gold, do not make the mistake of thinking they will give you a truly independent view of whether or not you should do a transaction. When 90% of their fees are contingent on a deal happening, it would be unfair to expect them to be genuinely independent.?

4. Embrace the data cube

One of the most frequent comments I get from CEOs and CFOs when going through a private equity transaction is how the level of data required in the process was way more than they expected.? All good advisers will tell you not to wait until the process has started to get your internal data in shape; listen to them. Private equity investors are getting ever more data-driven and having the right data in place well in advance of the process will free up your time to focus on other critical elements of the process such as spending time with potential investors to ensure the relationship fit is right.? More on that later.

So, my advice would be to get your data and KPIs sorted sooner rather than later. It won’t be cheap, but it will likely be worth it even if the private equity transaction never happens.

As an aside, another regular piece of feedback I hear from CEOs is that they wish they had done the data cube project sooner as it has transformed the way they look at their business.?

5. Take control of your choice of investor

Back to the idea of being scientific and taking control, I recommend doing your own analysis on the right choice of investor. This is one key area where information is power and you can take control of your own destiny. While a good adviser will of course give you input, they will tend to default to known relationships.

Here’s a few thoughts from me to help you on your way.

First, create a long list of investors that fit your size and deal type criteria (e.g. minority / majority investment), as well as how many existing investments they have in the tech sector. As with advisers, sector expertise is an essential criterion for a private equity investor. There are over 200 highly detailed private equity investor profiles on the Megabuyte database so there is certainly plenty of sector expertise out there; you just need to know where to find it (you do now!).

A harder, but arguably more important, element is to narrow your target list, looking at softer elements such as portfolio management style, where each investor is in its fund cycle, or its attitude to M&A. For this you can again lean on your network and ask your adviser. Then I recommend talking off the record to one or two portfolio companies of your shortlisted private equity firms; and do that sooner rather than later in the process.

One final note on choosing the right investor. The private equity firm that spams your in-box probably isn’t the right choice. But I would not exclude the investor that sends you a very well-crafted approach. We work with many private equity firms to undertake really quite detailed research before they even make an approach to a prospective investment, and this level of effort is a very good indicator of attitude, intent and the potential to pay a premium.? ?

6. Understand the critical elements of the deal structure

Honestly, this is not my area of expertise, it’s one for your advisers. But I do know that getting this right can materially impact the success of your relationship with your private equity investor, and also on your personal wealth! You will be bombarded with structuring options but my understanding is that there are a relatively small number that you really need to understand and consider very carefully. Specifically, based on my observations and conversations with multiple CEOs, I would focus on the detail of the sweet equity deal and the rights of investors to change the management team and/or force a sale of the company.

Remember, private equity firms are very much in sales mode during the process and may appear more agreeable and accommodating than they will be later, especially if performance expectations are not met. At this stage, they are not acting out of charity and will aim to secure the best deal for themselves. If you don’t understand the significance of certain aspects of the deal structure, they are unlikely to go out of their way to explain it to you.

7. Understand what to expect after the deal

Last, but definitely not least, understand what the relationship will be like after the deal. From anything other than a very small proportion of private equity firms, do not expect any significant support in making strategic decision or running the business. Do expect to be grilled on the detail of every number at every board meeting. Remember, almost no private equity investors have any experience of actually running a business, but they do tend to be very bright, data-driven people so you need to be on your data game.

There are also softer elements that you will want to understand, such as how much they want to be involved in day-to-day decision making. If you are a CEO that relishes autonomy you really don’t want an investor that wants a say, for example, in even relatively junior management hires. This can vary both by investor and investment professionals within individual firms. Again, before you sign on the dotted line, I recommend talking to the CEOs of a couple of other portfolio companies to get a sense of this.

So those are my own seven key elements of a successful private equity transaction, but I’m sure there will be many more that will come to light in our upcoming event on 18th September. I very much hope to see you there.

Your First Private Equity Deal: Insider Insights - remember tech companies that are Megabuyte subscribers have access to this event as part of their subscription and can RSVP here. We always have some space for invited CEOs so please drop me a message. And if you think Megabuyte can help as you move towards your next liquidity event, I’d love to hear from you.

Megabuyte offers comprehensive support to you and your board during your initial private equity transaction, or any subsequent ones, with a unique blend of three service elements that deliver independent, data-driven insights unavailable elsewhere.

1. Our company intelligence platform serves as a rich source of data and insights, including detailed profiles on every investor in the sector. Your board can use this information to triangulate your valuation and identify potential investors, among other uses.
2. We conduct exit planning workshops for boards, integrating data-driven insights with a clear understanding of valuation drivers, based on analysis of thousands of tech companies and transactions, and discussions with hundreds of CEOs each year.
3. Additionally, we provide access to our network of over 3,000 CxOs through our event and expert network programme, enabling our clients to ask challenging questions in a supportive and trusted environment.

Register your interest in attending Megabuyte's CEO Working Breakfast Your First Private Equity Deal: Insider Insights on 18 September 2024 at Charlotte Street Hotel, W1T 1RJ