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Why we exit when it’s right for the business

Nicol Fraser By Nicol Fraser,  September 23, 2016

When we make an investment, we have already considered exit options. That knowledge can shape a business’ strategy, but it does not drive it. Dunedin’s Nicol Fraser explains why a focus on building a better business inevitably leads to a better exit.

If you fail to prepare, you prepare to fail. We are asked when we buy a company if it’s a good deal. The truth is that we won’t know until the business has moved on to the next phase of its development.

Management teams should have an idea who the likely buyers are at the start of the journey. Regular exit reviews are a feature of our ownership and we usually set up an exit committee that meets regularly, perhaps four times a year. It monitors potential buyers, builds relationships with them and assesses when to appoint advisors.

The right time

What the committee doesn’t do is schedule a time when we will sell or have undue influence over the business plan. Exit has to come at the most appropriate time for the business, not according to our fund structure. I’ve seen businesses brought to market that have deferred capital investment or other important initiatives until there is a new owner. I believe you should make investments over the business cycle and trust that their value will be recognised by the buyer.

We invest to help a company get to the next level, turning a national business into an international success story or growing into new markets through identification, purchase and integration of value-enhancing acquisitions. In 2015, portfolio companies in Dunedin Buyout Fund III reported 20% employment growth, 12% general turnover growth and 44% growth in international turnover. 

We hope the exit will come after the business has achieved the objectives in the plan we have developed with management, but conditions change and we need to be flexible.

The right fit

The most common form of exit is a trade sale, with a secondary buyout increasingly an option for management to stay involved with the business. IPOs of mid-market companies are less common.

The management teams we back, our investors and our own team are aligned to achieve the same goal: growth that adds value and creates a better business. If management are to be involved with the new owners after a secondary buyout, there is potential for conflict in achieving maximum value as a seller and getting the best price as a buyer. This can be effectively managed through independent corporate finance advice.

According to plan

Exit planning is a part of business development. As a business improves, it becomes more attractive. We supported a management buyout of WFEL, the undisputed leader in the design and manufacture of military bridges. It had little in the way of sales and marketing, but had been successful as a supplier to the US Department of Defence. The narrow focus meant it was not attractive to many buyers.

We worked with WFEL to broaden its appeal, mapping the world for potential new markets and identifying bridges in the field that needed maintaining, building the capability to go for those markets. The result was not just increased sales to new and existing clients, but a whole new revenue stream from maintenance that reduced volatility. WFEL was bought by a German engineering firm, generating a 2.4 times return for Dunedin’s investors (and more for management).

The right result

We supported management in a buyout of same day courier service CitySprint in December 2010, employing our DebtBridgeTM solution, ensuring certainty of delivery of all transaction funding at completion.

Acquisitions were key to the growth plan, and we helped identify and assess a number of the targets with CitySprint. Dunedin made available a £17.4m acquisition facility and helped management through the M&A process. We also introduced David Burtenshaw, a 30-year logistics veteran, as chairman. During Dunedin’s investment period, CitySprint completed more than 20 acquisitions and turnover and EBITDA more than doubled.

As well as the acquisitions, we supported investment in CitySprint’s leading edge technology including “On the Dot”, a consumer-focused delivery brand. In February 2016, our original shareholding in CitySprint was sold in a £175m secondary buyout, backed by LDC.

The best of the best

When we look at a business we talk about building foundations, about setting in place processes that will make it best in class. We look at the finance system, sales & marketing, data, HR and aligning factory investment with operational efficiency. Once those foundations are in place, you can really grow a business. You should be doing that whether you’re private equity owned or not, whether you’re going to sell or not. If you have really solid foundations and a good growth plan your exit will be a lot easier because you have a future for new investors to buy into.

If you would like to talk about how any of these issues relate to your business then please get in touch –

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