We spend a lot of time in diligence on the numbers of course, but really, it’s the people. Does the culture fit with the business and where it’s going?
Tom Pemberton, Partner, Inflexion
While financials tick boxes, culture is what investors really get behind. “Ultimately, we are a people business, and the story around market opportunity and how a business can execute on it is key to how we think about investing,” explains Tom Pemberton, Partner at Inflexion. He goes on to say the team's capability, culture, and preparedness to scale and deliver ambitious opportunities articulated by the CEO are also important factors – for Inflexion, as well as other investors.
So important is this culture of ambition that it is never too early for a firm to prepare for a change in ownership or exit, so that when the time comes, the team can show a coherent culture capable of scaling to prospective buyers.
Andy Caffyn, who has sat on nine boards (including Inflexion-backed Xtrac and Detectortesters) and driven two exits as CEO, outlined the three phases of the exit stage: preparation, buyer engagement, and due diligence. He emphasised the importance of the preparation phase, which includes creating a data room, thinking about how a buyer might buy, and conducting vendor due diligence ahead of a potential auction. He estimates this can take around six months, with advisers guiding the process.
After completing all the necessary documentation, an auction process typically follows, with relationships typically already developed prior to this stage. Private equity firms generally provide a definitive response within two to three weeks, whereas corporations take longer to make a decision. Around the halfway point of the process, the CEO holds "fireside chats" with interested parties as a way to hold interest. Then a marketing phase begins, where investment memoranda (“IM”) are launched and a four-to-six-week engagement period is given prior to offers. During the diligence phase, hundreds of questions are asked, with around 25% of them relating to personnel. “It takes a lot of effort to accurately and quickly address all of them,” Andy stresses.
And after all that frenetic negotiating and planning comes the underwhelming finale: once all the legal documentation are signed, the exit itself is just a one-day event with little noticeable difference. “For the team within most businesses, it is simply a change in ownership, and the business continues on the next stage of its journey the next day,” Andrew explains.
The importance of the IM is not to be underestimated, with Andy calling it the “sales pitch” that explains each bit of the business, including strategy, market, competitive advantage, people, finances, and more. “Businesses cannot start to think about exit too early as they need to get paid for the value they have created and avoid “chips” for a problem that buyers may find or risks they perceive. Think what you want your IM to look like years beforehand and then take the time to get the company there, building the best business along the way,” he emphasises.
“Getting everyone on the same page as early as possible is crucial as it cascades through,” according to Tom, who adds and the whole organisation needs to be behind the vision. “The HR and people directors have a crucial role in ensuring people have a strong understanding of the organisation.” Pemberton stated that if a company has been doing acquisitions, especially internationally, how well integrated they are is also an essential factor. The diligence process focuses on the people, as culture and alignment are crucial for scaling and investment.
Tom Pemberton, Partner, Inflexion
The recent sale of luxury tour operator Scott Dunn illustrates the exit process. The clock was ticking on the investment period of the business and its backer since 2014, Inflexion, when advisers were brought in to explore exit options in July 2022. The pandemic had severely impacted the business initially, but a strong strategic vision cast by the capable leadership team saw the firm emerge strongly once travel returned.
Shelly Voecks, Chief People Officer at Scott Dunn, recalls how the exit process started slowly but gained intensity as they neared the finish line, with several interested parties at the start whittled down to two in the end, including the ultimate trade buyer. “In the last three months we came together as a management team to deliver cohesive messaging about Scott Dunn’s business transformation and our ambitious growth plans. The data room requests grew more intense as we progressed through due diligence and it became a seven day a week effort to ensure we addressed every question in a timely manner. We brought in an external resource to manage the data room process, track our responses and keep us organised,” Shelly recalls. In February 2023 it was announced that Scott Dunn was sold to Flight Centre Travel Group, an Australian listed travel company.
Since inception in 1999, Inflexion has exited 57 businesses, with nine realised last year returning over £1.6bn of proceeds to Inflexion investors, reflecting the strength of its value creation capabilities.