Print.IT Reseller recently travelled down to Chichester to meet up with Nigel Cook, CEO of Evolution Capital, a boutique corporate finance firm specialising in the ICT sector. We met up to discuss how the buying and selling of technology businesses has changed in the 20 years since Cook set up Evolution Capital and what shareholders should be doing to maximise their chances of a successful and profitable sale.
At the time of our meeting, the UK was being buffeted by severe economic headwinds, so we started out by asking Cook about the impact these might have on business valuations
Print.IT Reseller (PITR): How have the geopolitical events and macro-economic factors of the last two years affected the technology market?
Nigel Cook (NC): Two years ago we were just coming out of the second crisis in ten years, the first one being in 2008 with the banking crisis and then the effects of the pandemic. Supply chains were being disrupted and logistics teams were having problems with delivery and distribution. In our own space, 12 months ago, businesses were finding it hard to get routers and other equipment to complete installations.
The other big thing in that period was wage inflation. People had become dislodged from their work and many firms trying to get back to full capacity found they were short of skills. In our space there was a fair bit of head-hunting to recruit people to fill jobs. It was the very first time that we had seen buyers saying they were buying a business for its people and skills.
Then, in February last year, the Ukraine war started and that exacerbated the challenges we faced. As well as an emerging world food crisis, we had shortages of fuel which created inflation at a rate we hadn’t seen since the ’70s.
In the last six months, people have been concerned about whether we are going into another recession and whether there would be a really hard landing?
In actual fact, what we have seen is energy prices come off the highs they had reached and inflation not rise at the same rate as before. Generally, growth has held up and we haven’t gone into a recession.
PITR: Inflation and the interest rate rises that followed briefly raised the spectre of a banking crisis with the collapse of Silicon Bank and Credit Suisse. What impact are these events having on the technology market?
NC: When there are problems in banking, particularly in relation to the technology space, it will create a squeeze. For shareholders of businesses that are highly leveraged and have large loans, it can be challenging to meet interest payments and things associated with that. Buyers that are taking loans to fund their acquisitions can end up paying more because
they’re paying a higher level of interest and somebody has to swallow that. The question is, is that taken up in the price or is that taken up in reduced profits?
Overall, buyers may have to accept lower leveraging as the amount of a loan will be based around a multiple of their profits and banks will probably be looking to move a point or a half point down depending on the company. Banks will also be looking for increased headroom, contingency if you like, so if things don’t work out in the next 12 months they’ve got more space to manoeuvre.
Overall, will it impact the market? Clearly it will. That said, our clients tend
to be high performing, highly valuable, mid-market businesses and, if presented in the proper way, I don’t expect to see any change in the values that they can achieve.
PITR: What advice would you give shareholders preparing their business for sale in this period?
NC: The method and the extent of the preparation that we recommend hasn’t changed in the current climate. During the pandemic subscription income became highly valuable and highly sustainable. Businesses with 50%, 60%, 70% recurring revenue performed so much better than those with 10% or 20%. That’s obviously true. So, buyers and investors are clearly focused on getting to the bottom of what the recurring revenues are in a business – and not just the revenues but the gross profits associated with those long-term revenues.
Sustainability remains key and businesses looking to sell really need
to focus on explaining the level of sustainability and the quality of earnings associated with their activities.
PITR: How should shareholders go about achieving maximum value?
NC: There are three points to make here. First, shareholders need to consider that the value they could lose in the last phase of the process, the transaction phase, is far greater than what they may achieve through skillful negotiation.
Second, the complexity of the data and the detail that the investigation will get into needs careful preparation.
Lastly, the volume and complexity of the buyer’s due diligence is increasing significantly. Shareholders need to be prepared for up to 50 people in a data room looking at documentation from a legal, financial, technical standpoint and they need to be ready for thousands of questions on up to 2,000 documents.
Preparation is essential. You need to choose the very best advisor that you can afford and allow enough time for your team and your advisor’s team to come together into one unit that will take you through this process and manage all the questions and detail.
PITR: Why do your clients choose Evolution Capital?
NC: Looking at the profile of our clients over the last 20 years, we see two distinct groups. One consists of highly experienced management teams that have done it before; they know exactly what they want; they know the skills that they need to bring in during this six-month process to achieve an outstanding result; and they fully understand that the value they can achieve is enhanced by picking the right advisor.
The other group are people that have not trodden this path before. It’s their first time on this journey or they may have been through a situation where they’ve picked
a broker and been introduced to a client and it hasn’t worked out, so they are now looking to get organised and are looking for somebody to help them prepare for a successful outcome.
What both these groups have in common is that they involve highly motivated, very driven people who run premium businesses and are used to wanting the best. When it comes to the sale of their business, they’re not going to be satisfied unless they get full value. Such people are good fit with our team who are equally competitive, driven and naturally want to do their best.
PITR: What are some of the big changes that you have seen over the last 20 years?
NC: I get asked this question quite a bit. My answer is nothing has changed – with the exception of the sectors that we serve, the business models that our clients work to, the activities they perform, the revenues or profits they enjoy, the values they achieve.
Apart from that, nothing’s changed! Go back 20 years and we were probably engaged in advising a telecoms business that was turning over £3 million, had 20% or 30% recurring revenue, and was valued in line with its revenues at £2 million or £3 million. Today, our clients tend to be more in the region of £10 million to £15 million in value, they offer a range of fully integrated services covering telecoms, data and IT, and their business model is up to 100% recurring revenue.
In terms of the actual funding element, 20 years ago it was all funded by entrepreneurs doing direct deals with banks. Now, it is PE-backed and that creates quite a different funding structure.
Those things have changed. What hasn’t changed are the incredible people that you meet who run these businesses. The very best have such high standards for themselves and that’s reflected in the performance of the businesses they run.
PITR: What’s next for Evolution Capital? NC: Evolution took a good look at itself just before the pandemic and also took some advice. Our strategy then was to divide our seller side from our buyer side, because they were quite different bodies – one stretched the cash flow, and one created the income stream – and the skills that were involved in those two sides were also quite different.
We went on a journey to identify new talent, the very best people that we could recruit, bring them on board, get them all working together as a team, and then decide how we might go forward.
When you bring on very talented people, you don’t only improve productivity and efficiency, you produce a creative environment where you start not just to do things better but to do better things. In the last 12 months, we’ve introduced a number of new services; we are applying technology at a rapid rate; and in the next 12 months, we will be launching some market leading services on both the sell and buy side.
PITR: What lessons have you learned over the last 20 years?
NC: I went to Bordeaux for the third time last year. When we go there, we generally
visit a vineyard and taste some wine and have a walk around. We were on a tour
of the fields, and the guide pointed out new vines on one side of a fence and
old vines on the other. The old vines were gnarled and crooked, while the new ones were young, vigorous and a fair bit higher. I said ‘It’s quite clear that these are new and those are old, but why are these ones planted within a metre of each other and those are planted two metres away?’. He turned to me and said: ‘Well, we found that if you plant the vines closer together, they fight to survive and because they have to draw water from deeper, they grow stronger. Not only does that improve productivity, it also improves the quality of the wine’.
What I’ve learned in the past 20 years, having been through two major crises
and recessions, is that when there is a market downturn it exposes weaknesses
in a business but if you face up to the challenge, then you will emerge stronger than when you went into the crisis. My takeaway is that such challenges are good and that we should embrace the bad times as well as the good.
The team that I’m working with now is far more talented and experienced than I’ve ever had before and because they’re younger they’ve got a different way of doing things which is enabling
us to deliver better outcomes and new services and move into new areas. We are extremely busy and moving forward at an incredible pace.
