20 Jul 21
The Journey to Exit (Webinar) – 6 July 2021
Thank you to our 3 panellists, all founders of successful sports and media businesses, for a thought-provoking and insightful Q&A on their respective journeys to a partial or full exit. We heard from:
- Aidan Cooney founder of Opta Sportsdata in 2002, which was sold to Perform Group in 2014. Aidan has since gone on to found Ellipse Data and InCrowd Sport.
- Harry Horsley who, with Leo Thompson, founded sports rights agency TRM Partners in 2013 before selling to Two Circles (backed by US private equity fund, Bruin Sports Capital) last year.
- Robert LeMieux who, with his wife, Lisa, founded equestrian products business Horse Health Wessex (now called LeMieux) in 2003 before selling a minority stake to private equity fund, LDC, earlier this year.
Key takeaways from the webinar were:
- Dilution. A company may require funding prior to an exit which begs the question of how much should a founder’s equity be diluted. There are legal implications if a shareholding drops below certain levels (e.g. 50%) but often, with the right investors onboard, a founder can retain control in practical terms. The key is to find an investor, who shares the founder’s vision, at a time when the business is in a positive financial position, ideally with more than one interested investor. Founders should also consider whether debt (which avoids dilution) is a credible alternative to offering up equity prior to an exit.
- No Right Time. An exit opportunity can arise in a number of different ways, including: in the form of unsolicited approaches; at the natural end of one investment cycle with an initial group of investors exiting, where new capital and/or new blood is needed to take the business to the next level; or actively going to market to seek an exit, ideally via an auction to engage multiple bidders in a competitive process. A founder should concentrate on establishing and growing their business rather than getting fixated about an exit too early.
- Types of Buyers. If a founder is proactively looking for potential purchasers, it is important to explore the different areas of the market, from strategic trade buyers to private equity and other financial buyers. Engaging advisers early in the process with the relevant experience (a combination of legal, corporate advisory and tax) is likely to be beneficial to drawing out the best buyer and the best price (despite adviser fees) in the long run.
- Determining Value. In determining value (often based on multiples of EBITDA or multiples of revenue that are within normal ranges for that sector), important metrics are company specific but include: long term contracts/healthy client lists, opportunity for growth and scalability, demonstratable returns and strong trading/financial performance and a good ongoing management team.
- Payment Structure. A founder should appreciate that many purchasers expect a proportion of the consideration to be payable post-completion to de-risk their acquisition. For example, many purchasers require the selling founder shareholders and employee shareholders to remain for a number of years post-completion in the form of an earn-out. It is important for a founder to be comfortable with the day-one monetary amount received (as a large amount of control is typically lost by the founder immediately post-sale) and to carefully agree the structure of any post-completion consideration.
- Preparation for Exit. Be prepared! A sale process will involve close scrutiny of every part of the business by the buyer’s lawyers, financial advisers and other due diligence providers. Putting good processes in place now – including the management of contracts, financial information, employee arrangements, share option schemes (as appropriate) and keeping up-to-date statutory registers – will help ease the burden. In the case of an auction, being able to quickly provide buyers with documents and information in response to their due diligence questions will help maintain competitive tension.
- Staffing. The sale process is likely to take up a significant amount of management time, so consider how and when other members of staff and existing investors will be informed and/or become involved. The business still needs to function and be performing at its best while the sale process is ongoing.
- Incentives. Consider granting tax efficient share option schemes (e.g. EMI) approved by HMRC to incentivise employees/management well in advance of a sale. In fact, schemes should be put in place prior to a sale or potential sale even being contemplated as HMRC are unlikely to approve a tax efficient scheme if the company is already actively working towards a potential sale. While transaction bonuses for employees/management at completion may be more flexible, they are far less tax efficient for both the company (and in turn the selling shareholders) and the employee shareholders.