Sale processes: how to win management over

"Competition for quality assets is fierce. We are seeing aggressive deal processes and more pre-emptive bids," says Andy Morgan, corporate finance partner at Grant Thornton. Indeed, average pricing for mid-market deals is continuing to creep up, with Argos Soditic's latest Mid-Market Index posting median entry multiples for European assets at 8.1x EBITDA in Q4 2014.

This increase in deal valuations – close to 2007 levels – has been attributed to higher multiples paid by corporates. Says Morgan: "It's not all about private equity, there are plenty of pre-emptive trade deals as well due to lots of cash sitting on corporate balance sheets."

In this heated environment, Morgan has observed both private equity houses and corporates paying whatever price is needed to get the deal done, competing in contract races, and a rising number of pre-emptive bids.

Given improved efforts from all types of potential buyers or investors for winning deals, what can the industry do to ensure it continues to deploy cash? Winning management over is one area that appears increasingly crucial in clinching competitive processes.

Steve Hacking, training director at Kardelen Training, which offers training courses for management teams, has conducted extensive research in this area working under his other guise as a strategy consultant at Latitude Partners. Hacking's study to date comprises more than 60 in-depth interviews with a range of professionals including corporate financiers, CEOs of private equity-backed companies, CEOs of non-private-equity-backed companies, chairpersons, LPs and private equity houses.

Changing lanes
Hacking first outlines how the decision-maker changes during the deal process; during the invitation and shortlist phases, the adviser will have control. He says that during these stages, the adviser will focus on a potential bidder's reputation, their sector credentials, checking that the deal type and size is suitable (including capital needed for potential future acquisitions), as well as price and deliverability.

Hacking also notes many advisers have an eye on perceived appetite; through fund-mapping some corporate finance houses have an understanding of how invested a fund is and, therefore, how keen that house is to put money to work. Another important but less obvious factor is relationship; whether there has been some level of reciprocity with that house in the past.

For the invitation and shortlisting stages, GPs have a level of control over the key deciding factors – basically ensuring their investment strategy is relevant to the asset. Buyout houses have clearly adapted to this processes, with the majority of UK houses listing relevant information on their website, such as previous successes, preferred types and size of deals, as well as average tickets.

Reputation, price and deliverability are all dependant on a buyout house's track record. "Some houses have reputation for paying at price promised and not asking for more stringent terms," explains Hacking. "One big difference between private equity and trade buyers at this stage is deliverability. If trade finds something surprising in the due diligence they are more likely to continue with the deal because there is often a strategic reason behind it, whereas private equity will be more concerned if something unexpected crops up."

Natural selection
By the time the invitation and shortlist stages are complete, management teams are more often than not suffering from deal fatigue – having been on a roadshow for several months by this point. It is safe to say that in most cases, management simply wants the process to be over.

With that in mind, Hacking has identified and ranked five key factors managers will base their final decision on. The first, unsurprisingly, is price; this is a competitive situation after all.

The second is ensuring the private equity house is a committed backer. "Managers want bidders to show an understanding of the business and its challenges," Hacking says. Typical questions management will be asking themselves include: have they made an effort to understand me? Did they make an effort to come to my offices as opposed to inviting me to theirs? Did they ask the right questions? Do they believe in management?

Many houses fall down because of this; GPs often focus on how to divide the pie rather than think about how to make it bigger. While private equity firms are aware of how to develop relationships with management, it is interesting management teams continue to raise these issues.

Grant Thornton's Morgan echoes this sentiment. "If a process starts and the private equity house hasn't met the management team three of four times, and doesn't know the sector inside out, they shouldn't be in the process," he says.

A third important element is having a trusted partner. Many GPs position themselves as partners to management, but the importance of individual relationships should not be overlooked. "An average company does not know the nuances of each private equity house so they are making their decision based on the person doing the talking, often a senior member of the investment team. Management teams more often think in terms of people rather than firm," explains Hacking. Management will have likely researched the private equity firm online, so it is vital a GP's online presence is consistent with what the individual has said.

Furthermore, management needs evidence the GP can support specific growth ambitions. If the business wants to expand overseas, for instance, it needs proof the private equity house has this sort of expertise. "Trust is developed through consistency. Management is very alert to any inconsistency at this stage – they know they are sought after," says Hacking.

Risk-averse
The next crucial factor is attractive terms discussed in a transparent manner. While management teams will understandably be considering their own terms and incentivisation, they also tend to be more risk-averse than private equity. "They don't want to introduce excessive risk; management teams are much more aware of structures and what they mean," says Hacking, who notes that managers' awareness of structures has developed greatly over the past 20 years. He also recalls deal processes where the GP offering all-equity won simply because of the reduced risk.

The second part of this consideration is talking openly about terms. "One way to guarantee a failed process is to change terms at the end of the deal. If they need to be changed do it early or be open and explain why, otherwise all trust is lost," advises Hacking.

The final aspect is commitment to deliverability. "When management is suffering from deal fatigue, they want some guarantee that the deal will actually happen," says Hacking. One way to show commitment to getting a deal done is arranging debt facilities – this shows management that a deal will be delivered.

Takeaways
For private equity houses, these deciding factors mean a sharp focus on partnership is important. For Hacking, it's all about being part of a team – "that the GP has gone out of its way to understand the market, has listened to management and asked informed questions," he says.

Hacking also advises that meetings held early on in the process should be centred on growth and the future, rather than deal structures and more technical matters. He also encourages GPs to avoid focusing too much on previous successes. "The adviser will have told management about their experience in the sector and management will have done their own research," he says.

As the competition for assets in the mid-market continues to grow, most GPs now use very sophisticated origination strategies – but it does not hurt to go back to basics and remember who is calling the shots.

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• Unq2015May