welcome [] 2017...trade sale market analysis henry whorwood, 15th september 2017 context: beauhurst...

YCF Conference 2017Getting to Exit: Trade Sales

WelcomeEvelyn Simpson

Trade sale market

analysisHenry Whorwood, 15th September 2017

Context: Beauhurst exit statistics

· Beauhurst has tracked high-growth, UK-based companies since January 2011.

· Of the 15,571 companies we monitor, 795 have been acquired.

· 687 were acquired by strategic investors, 108 by financial investors.

· The rest of this talk will provide some analysis on those 687 acquisitions.

UK and USA main acquirers

· Perhaps unsurprisingly, the UK and the USA are at the top

· France and Germany, the two Continental European powerhouses, come right after

· Japan and China come very low – but bear in mind data go back to 2011, which obscures their more

recent interest; and both countries prefer more mature businesses

Country Number of acquisitions

UK 427

USA 126

France 20

Germany 15

Netherlands 10

Japan 9

Sweden 9

Canada 7

Belgium 5

China 5

London and SE main beneficiaries

· Again, unsurprisingly, London and SE top the charts

· Scotland tops Wales and NI

· North West is perhaps the surprise here, very high up

Region Number of acquisitions

London 218

South East 92

North West 77

East of England 55

Yorkshire and Humberside 39

South West 37

North East 36

East Midlands 33

West Midlands 30

Region Number of acquisitions

Wales 23

West of Scotland 11

Northern Ireland 9

East of Scotland 9

Tayside 7

Aberdeen 6

Highlands and Islands 3

South of Scotland 1

Tech at the top

· Unsurprisingly, tech comes first – but Professional services not far behind.

· The remaining sectors are very far behind the top two

Sector Number of companies in sector

Technology/IP-based businesses 333

Business and Professional Services 302

Industrials 146

Retail 74

Media 67

Leisure and Entertainment 49

Personal services 39

Supply chain 39

Built environment and infrastructure 24

Telecommunications services 23

Energy 18

Tradespeople 14

Transportation operators 10

Craft industries 7

Agriculture, Forestry and Fishing 5

These are the three biggest Scottish

acquisitions...

Skyscanner

acquired by China’s

CTrip International

for £1.4b in 2016.

Booth Welsh

acquired by

Australia’s Clough

for £9m in 2016.

Touch Bionics

acquired by

Iceland’s Össur for

£27.5m in 2016.

IOmet Pharma’s acquisition by

America’s Merck in 2016 for an

undisclosed consideration is also

likely to have had a significant

price tag. According to Beauhurst

data, its last post-money valuation,

in 2014, was £35.5m.

Exits From A Managers Perspective

Charles Sweeney

CEO, Critiqom Limited

A Managerrather than

an Entrepreneur

Early Career

1985 Graduated in Computing Science from Glasgow University

1985 - 87 Burroughs Machines (Unisys) Software Engineer

1987 - 89 The Turing Institute Artificial Intelligence research

1989 - 95 Unisys Pre-sales Consultant, Technical Architect and Project Manager

Telecom Service Centres

• Founded in 1995 in Rothesay, Isle of Bute

• Joined in June 1995 as IT Manager; appointed MD in 2000.

• Contact centre outsourcing focused on Mobile Telecoms and Finance

• Business grew from 8 to 1,800 staff.

• Revenues in FY 2002 at £31.2m and profits of £3.7m

• Most successful Scottish startup in terms of job creation

• Additional sites is Dunoon, Greenock, Falkirk and Aviemore

• Sold to LDC in 2003.

Growth Companies from 2005

• IRW Systems (Non Executive Chairman)

• Bespoke software house

• Pre-pack (2005) to MBO (2010)

• Farmpharm (CEO)

• Online animal pharmacy

• Acquired by MedicAnimal 2011

• Bloxx (CEO)

• Web security specialist

• Acquired by Akamai in 2015

Some Lessons Learned

Lessons – Pre Planning

1. Plan for investment/sale at all times

Establish a Data Room

One source of truth

Standardise contracts, HR, etc.

Remove the gremlins

Protect IP

Establish clear water from competition

Lessons – Pre PlanningDevelop a Value Statement

2. “Not for Sale” but talk to everyone

Hone your corporate pitch

Have a company CV and Roadmap

3. Understand the Environment

Who might invest/acquire

Connect with them at the correct time

Track sector M&A activity

Understand and replicate metrics used

4. Use PR to enhance the corporate value of the company not just to attract new clients

Lessons – Pre Planning

5. Shareholders

Agree long term plan

Understand their exit criteria/timings

Agree valuation metrics

Feeds into strategy discussions

6. Build a Team

Experience of acquisitions in both executives and non-executives is desirable

Three-tier succession planning

Pick advisors with a view to investment/sale

Lessons - Equity

7. Management Equity

Address options/shares for management team

Build a defendable position

Tax planning/awareness

Lessons – Acquirers

8. One in ten approaches will complete

9. The Acquirer

Understand their motivations

Understand their previous deals; structure, valuation and outcome

Know who are the Sponsors and Decision Makers

Not all NDAs are equal

Agree value before formal due diligence

10. Understand (and influence if possible) their post-sale 100-day plan

Lessons – Sale Process

11. Process Management

Have experienced advisors you trust

Know your role and everyone else's

Clear communication to purchaser/principals

Keep the process and timetable tight

Be prepared for skeletons emerging

Every action is sale focused

12. Legal Agreements

Control Share Purchase Agreement if possible

Disclosure Letter and Warranties are key documents for management

Lessons – Impact of Sale Process

13. Company performance will suffer

14. Internal communication

You have hired intelligent people; the tent will get bigger

No lies but you are restricted in what you can say

Manage expectations for every outcome

15. Process is stimulating but exhausting

16. Be aware of “the red mist” descending on both sides

Lessons – Post Sale

17. Purchaser HR plan for the business is subject to change

18. Your Role

Understand your future role/package

Re-confirm your understanding post-sale

Lessons – Personal Impact

19. Emotional Impact

Culture will change

Colleagues may leave

The purchasers motivations are better understood

Where did the cash go ?

Relationships change; “The king is dead, long live the king”

Possible disappointment; “Mourning the past”

20. Moving Forward

Think net not gross

Remember that this is the start of the next stage

Thank you,any questions ?

@DonaldMcL

Disrupt or be Disrupted

Filling a Gap

Connections

Poster Child

Collaboration

Culture

Earnout Expectations

Timing is Everything

Dream Big


Scott-MoncrieffGareth Magee


Break


Welcome Back

Kate AdamsonYann Robin

Friday 15 September 2017

Patent Attorney Patent Attorney

Getting to Exit: Trade Sales

An IP perspective

Importance of IP in Trade Sales

Why is IP relevant?

© 2017 Marks & Clerk LLP | Marks & Clerk is a registered trade mark.

• IP is a key asset for many companies

• Investment or sale

Due diligenceNo IP protection = no certainty = no deal?

• Considerations

Have you filed for the right things? (patent, trade mark, design…)

Have you covered your key markets?

Can you demonstrate a thought-out IP strategy?


Why is IP relevant?


• Scenario 1

Company 1 – Start up

Great product – prototype stage

Patent Applications pending covering the product in key jurisdictions

Understand existing patent landscape/freedom to operate

Investor/buyer’s decision hinging on Due Diligence


Why is IP relevant?


• Scenario 2

Company 2 – Start up

Great product – prototype stage – early tests promising

Did not want to waste money in IP – relied on trade secret

No manufacturing facilities – requires industrial partner

Early talks under NDA

What next?

Scope of protection

How to maximise the value of your IP


Does your patent cover your key products?

Yes - primary focus

Scope of protection

Key product/process

Scope of protection




No – focus has changed over time

Scope of protection




No – focus has changed over time

New

application?

New

application?

Scope of protection



What are others doing?

Ownership



Does your company own your IP?

Or is it owned by: individuals? contractors? university? collaborators?

New

application?

Summary


• IP can be an important company asset

• Strengthening your IP position is valuable at any stage, but particularly when preparing for sale

Thank You!

Contacts


Yann Robin

[email protected]

0141 221 5767

Aurora, 120 Bothwell Street, Glasgow G2 7JS

Kate Adamson

[email protected]

0131 221 7000

Atholl Exchange, 6 Canning Street, Edinburgh EH3 8EG

Patient capital…everyone has to exit one day…

David Baynes, Chief Operating Officer

What do all of these have in common?

56

Evolving great ideas into world-changing businesses

57

STRICTLY PRIVATE AND CONFIDENTIAL

Disrupting the traditional venture model

58

Building a leading global position

59

STRICTLY PRIVATE AND CONFIDENTIAL

28 university partners & 96 companies across 3 core regions

14 partners

5 partners 9 partners

How to maximise the exit (Extracts from our inhouse training).

60

Key factors

Macro

Socio-economic

Capital markets

(Sector) sentiment

Micro

Strategic acquirers

Valuation

Execution

Valuation methodologies

DCF

PER ratios Comps

Most important method used

DCF 39%

IRR 18%

PER 17%

Comps 15%

No of valuation methods used

1 15%

2 12%

3 40%

Source: RW Mills, 2002 & 2008

The importance of timing and the US markets….

Long term trends in PE ratios

Source: Robert J Schilling, Irrational Exuberance Princeton University Press

Not all profits are equal…. US PE ratios by sector

67

What lessons do we take from this?

• Be aware of what metrics potential acquirers are likely to value you on.

(Accentuate the positive)!

• Timing is important in term of the multiple you will get.

• Consider your sector if you want to maximise your returns.

• Make sure your ambitions match with your investors.

• Identify your potential purchaser(s) even early in a companies life. (Get to

know them).

• Consider selling at the key sizzle to sausage transition stage.

• Remember you will probably only sell once, so try to ensure you end up

dancing in the end zone!

So how can investors help with exits?

68

Advice & transaction experience

Resources & execution support

Networks & relationships

69

Good luck!

The Grass is Greener“If only we were in America….”

The Exit - Its Inevitable

• Retire.• Do / Start something else.• Spend more time with the family.• Need Cash / Family Security.• Realise this isn’t fun any more. • Die.• Partial exits. (Sell a bit you don't want anymore)• Its nice to be able to say “No Thanks”.• Just want to sleep better knowing that you could

exit if you wanted to.

The Good News

Country Rank By No Of TECH Exits 2016

“The number of start-ups that exited in London is almost the same as for the other top seven cities in EuropeCombined”.

Bad News

Distribution of Outcomes2016

2007

2009% o

f To

tal

Exit multiple

2.5X22% IRR

70%Fail

The Good News• Archangel.

– 80 companies, 22 active, 39 failed, 20 positive

– IRR of 20.9%. (BVCA 14.9%).

• Tech Coast Angels.

– Since 1997, 305 companies, 63 positive exits, 80 write offs.

– 45 @ 1x, 12 @ 5x - 139x.

– 3.33x, 26% IRR.

Achieving Exit is not about how much Funding you

have

Exit Price Compared to Total Capital Raised

Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve, May 2014

Groupon paid nothing to acquire LivingSocial (16/2/17)

Groupon (NASDAQ: GRPN) 4Q earnings report has revealed that "no consideration was paid" to take over LivingSocial. Once valued at north of $5 billion, LivingSocial is apparently now worth nothing at all.

“That isn't the preferred outcome for the coupon company's investors, to say the least”.

Founded in 2007, LivingSocial had raised more than $1 billion in VC funding from backers including Lightspeed Venture Partners and Revolution Ventures. That includes a $176 million capital injection in 2011 that valued the company at $5.37 billion.

The Typical Exit Plan“Dead Cert will strive to provide an exit in 5 to 7 years in the form of a trade sale to a leading life sciences R&D company or digital health/wellness company where the data is complementary to their existing health and wellness data or, alternatively, to a large pharmaceutical company. An IPO will also be considered”.

Data Informs Reality

“Entrepreneurs come with anecdotes of huge exits chronicled by the media, but the plural of anecdote is not evidence.

We counterbalance unbridled hope and delusional optimism with the reality of eleven years of historic Ohio data”

John Huston, Founder of OhioTech Angels & former ACA Chairman

“Start the process by thinking of your business as a product you are going to package for a very selective customer…..the buyer who will pay the highest price.”

Dr. Tom McKaskill, Ultimate Exits

Build “Acquirer Value”, not

Shareholder Value

Some Fundamentals

• We Started With Alignment of Interest.

– Objective is to achieve profit through an exit.

– Most likely exit is M&A.

• We Discussed and Agreed Realities of Exit and Reframed the Business Plan Accordingly.

• We Understand the Likely Exit Partners

– What Their Acquisition Sweet Spot Is.

– What We Need to Look Like to Be Attractive.

– What Time & $ that Will Take to Achieve.

• We Have a Budgeted Plan - How to Get Noticed.

Exit Due Diligence• Ask for detailed exit analysis:

• Five most likely strategic cash bidders.

• What actually needed to attract them.

• Range of possible time and money needed to exit.

• DD this –

• Have any money?

• Have ever actually bought anyone else?

• Have done so in this geographic area?

Present Data

Post Investment➢Build & Understand exit options.

➢Track your strategic targets.

➢Measure against exit (acquirer) value.

➢Put transaction experience onto board.

➢Ask “exit orientated” questions.

➢Board Agenda Item.

➢Written Exit Strategy.

With Current Funding

Next Funding

Exit

Generate Cash to Support Growth

Strategic Investing

Create Value in eye of:

• Likely Next Funding Partners – (Capital Risk)

– What Their Investment Sweet Spot Is.


– What Time & $ that will take to Achieve.

• Likely Exit Partners – (Exit Risk)

– What Their Acquisition Sweet Spot Is.


– What Time & $ that Will Take to Achieve.

• Have a Budgeted Plan - How to Get Noticed.

Initial Funding

2nd

Funding

Exit

Generate Cash

Exit

Exit

Generate Cash

Generate Cash3rd

Funding

4th Funding

Creating Choices

Maximising Return

Reducing Risk

Every Board Meeting• CEO reports on market Exit transactions of

competitors & Targeted Strategic Bidders.

• Update Capital Access Plan

– Current burn rate / Months to fumes.

– Identified Next Funders & their KPI’s

– Progress against THEIR required KPI’s.

Initial Funding

2nd unplannedFunding

The Sad Reality4th unplannedFunding

3rd unplannedFunding


Lunch


Welcome back!Evelyn Simpson


Eden ScottKeith Tocher

PREPARING FOR ‘EXIT’

Rupert Lyle

The Oakwood Partnership

15 September 2017

TWO KEY REQUIREMENTS

1. The Equity Story

1. Vision

2. Ability to Deliver

2. ‘Exit’ Readiness

THE EQUITY STORY: VISION

Needed for ANY corporate event which requires an

external stakeholder to join with you on your journey

VISION: THE COLONIZATION OF MARS

Ownership Private & VC

Funds raised $2.3bn

Last Round Valuation $12bn

Strategy: 1. Rockets (2002)

2. Reusable Rockets (2011)

3. Manned Interplanetary Spaceflight (2017)

VISION: TO HELP EXPEDITE THE MOVE FROM A MINE-AND-BURN

HYDROC ARBON ECONOMY TOWARDS A SOLAR ELECTRIC ECONOMY

Ownership Public: NASDAQ

Market Capitalisation $57.5bn

Funds Raised $16bn

Strategy 1. Very Low Volume High Value Car – Roadster (2003)

2. Medium Volume Medium Value Car – Model S (2009)

3. Battery Technology – Gigafactory (2013)

4. High Volume Low Value Car – Model 3 (2014)

5. Home Energy Storage – Powerwall (2015)

6. Solar Technology (2016)

7. Commercial Vehicles & Pick Ups (2016)

“AS OF 2016, THE NUMBER OF AMERIC AN C AR COMPANIES THAT HAVEN'T GONE B ANKRUPT IS A GRAND TOTAL OF TWO: FORD AND TESLA. STARTING A C AR COMPANY IS IDIOTIC AND

AN ELECTRIC C AR COMPANY IS IDIOCY SQUARED.”

Elon Musk, CEO, Tesla

VISION:THE EVERYTHING STORE

Ownership Public: NASDAQ

Market Capitalisation $465bn

Funds Raised $27bn

Strategy 1. Books (1995)

2. Movies (1998)

3. Amazon Prime (2005)

4. Amazon Cloud Services (2006)

5. Amazon Music & Amazon Kindle (2007)

6. Amazon Fire & Echo (2014)

7. Drones (2016)

8. Whole Foods (2017)

VISION:TO CHANGE THE WAY PEOPLE EAT THEIR FAVOURITE RESTAURANT

FOOD

Ownership Private Founders & HNWI’s

Last Round Valuation Undisclosed

Funds Raised £800k

Strategy 1. Better. Faster. Cheaper. Cooler.

2. Pizza (2017)

1. Edinburgh Cluster

2. Other Cities

3. Transport Hubs

3. Other Restaurant Favourites - Subs, Noodles,

Salads, etc. (TBA)

WHY IS IT SO IMPORTANT?

It aligns EVERY stakeholder at EVERY point in a common Vision.

Stakeholder Misalignment Stakeholder Alignment

THE EQUITY STORY: DELIVERY

Needed to convince anyone who ’Gets the Vision’

that you can deliver it

THINK LIKE A WORLD CLASS SPORTSMAN

• Despite the fact that you are already ‘World Class’ surround yourself with the best people you can find in every area you don’t have a competitive advantage.

• Executive

• Non Executive

• Advisory

• And EMPOWER them.

EXIT READINESS

Addressing Every Impediment to Value BeforeYou

Start Discussions With External Stakeholders

EXAMPLES

• Gaps in the Management Team

• Operational Issues

• Working Capital Issues

• Intellectual Property Issues

• Legal or Structural Issues

• Contingent Liabilities

CASE STUDIES

QUESTIONS

THANK YOU

Rupert Lyle

07799 587 568

Derek ShawHead of Investment Management

Scottish Investment Bank

15 September 2017

The Importance of Exits

• Without returns, investors wouldn’t invest into the asset class

• It demonstrates the success of the model as a means of generating returns

• Encourages more participants in the market – entrepreneurs and investors

• Creates dynamic funding environment – establish, grow and scale companies

• Returns on our investments allows us to recycle funds

• Provides a mechanism for further investment & growth

• SIB – large portfolio of investments, need to generate income

Investment Returns 2015-16

• Record year for exits

• Highest level of income in 5 years

• £35.7m income from SIB Activities (more than double 2013/14 high)

• 13 Exits 2016-17, 12 trade exits – 8 of which generated positive IRR

• £25m of income generated from exits on investment of £12m – net return of £13m

• 2.1x return on investment

Investment Returns 2016-17

• Volume and Value of exits down from Previous year

• £ 22.6m income from SIB activities

• 10 exits - 3 trade, 2 MBOs, 4 buy-backs, 1 loan repaid.

• £12.7m income generated on investment of £10.7m – net return of £2m

• 1.18x return on investment

SIB Exits 2011-17

• Total SIB income - £100m+

• 38 trade exits over last 6 years

• Income from exits – £65m+

• Net return on investment -£25m+

£0

£5

£10

£15

£20

£25

£30

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

£

m

Income from Exits

Amount Invested Net Return

2017 Overview

• Global M&A market witnessed a contraction

• Evidence points to this slowdown continuing for the remainder of the year given

• c38% and c35% reduction in the number and value of deals completed

• Exit market for VC-backed companies witnessed a reduction in numbers over the last two years.

• Acquisitions have been slow as corporations work on internal mechanics & organic growth

• Hold period for VC-backed companies has risen quite substantially in recent years

• Lengthening hold periods due in part to rising deal sizes & availability of late-stage capital

• Slowdown witnessed in SIB Portfolio – no exits in first half

• Hopeful of rebound in activity in Q4 2017/ 2018


Scottish Investment BankScottish EnterpriseAtrium Court50 Waterloo StreetGlasgowG2 6HQ

[email protected]. 0141 228 2141

For all general enquiries telephone Scottish Enterprise on 0845 687 8787

Contact Email [email protected]

For more information about The Scottish Investment Bank visit www.scottish-enterprise.com/sib

Scottish Enterprise can also be followed on Twitter at twitter.com/Scottish Enterprise

Thank You


Scottish Investment Bank

15 September 2017


Panel DiscussionChaired by Evelyn Simpson


Round up!Evelyn Simpson


Thanks for coming,see you next year!

welcome [] 2017...trade sale market analysis henry whorwood, 15th september 2017 context: beauhurst...

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