Despite the downturn in the general economy, Nadim Meer, partner in the private equity group at UK law firm Dundas & Wilson, says that training companies are still a hot sector for mergers and acquisitions. He looks at the pitfalls that can come with buy-outs and how to avoid them.
In recent years the Government has made a firm commitment to improving the skills of the UK workforce, with major investment in training initiatives. An example of this was the launch of initiatives such as “Train to Gain”, the budget for which should exceed £1bn by 2010/11. This is in the context of overall annual funding commitments of £7bn for distribution by local authorities and a further £4bn earmarked for the new Skills Funding Agency.
"There have been plenty of mergers and acquisitions in the training sector in the last year. This is likely to continue and will provide plenty of opportunities for training company owners and management teams looking for an exit or an investor to fund an MBO."Nadim Meer
The result has been an increasing number of institutional investors looking to buy well-run, predominantly government-funded training businesses. Investors like the fact that these companies have solid and stable revenues (often under long-term, secure contracts), that there is significant potential for further growth as a result of the projected increase in government funding and also the fragmented nature of the market.
Consequently, there are significant opportunities for the owners of such businesses to sell, or for management teams to undertake a management buy-out (MBO) which could be funded by investors. An MBO would allow the managers to own a stake in the company and share in any upside as they grow the business.
Mergers and aquisitions
There are numerous examples of these types of deals. Sovereign Capital, for example, invested in Pelcombe training (subsequently renamed “esg”) which then acquired training businesses such as Orient Gold, Triangle Training and Paragon, and was itself reportedly for sale at a price of £80m. Other investors include the publicly listed Melorio plc, which bought Construction Learning World for £35m in October 2007, Close Brothers Private Equity, which acquired Protocol Skills for £46.5m in September last year and Barclays Ventures, which funded the £15m MBO of Develop Training in December 2007. Further, in May this year, Aberdeen Asset Managers Growth Capital backed the MBO of Training for Travel. Each of these businesses is likely to make further acquisitions of training companies in order to increase their market share and turnover.
In short, despite the credit crunch, there have been plenty of mergers and acquisitions in the training sector in the last year. This is likely to continue and will provide plenty of opportunities for training company owners and management teams looking for an exit or an investor to fund an MBO.
Risks
Whilst the opportunities may be great, there are risks, and a number of issues to consider. The first is selecting the most appropriate buyer. As was seen when the very acquisitive Carter & Carter went bust, pick the wrong buyer and things can go horribly for the seller - particularly where payment is deferred or comprises shares issued by the buyer (as was thought to be the case in many of Carter & Carter’s deals). In such circumstances there are obvious repercussions for the ongoing management team, employees and the business as a whole.
The structure of the deal is of crucial importance. For example, will the seller receive payment in full on the day of the sale or will a proportion of the payment be deferred pending future financial performance of the business? Another issue is whether or not the seller will retain a stake in the business, particularly if he or she intends to remain after the sale. The structure of the deal should also be made as tax efficient as possible.
Any buyer is likely to request that legal and financial due diligence is undertaken on the target group. There will be seemingly endless requests on the management team for documentation together with further rounds of follow-up questions from the buyer's advisers. This can sometimes lead to a loss of focus on the underlying business.
As part of the sale, the seller will be required to provide warranties regarding the state of the business. If these prove untrue, the buyer may be able to re-coup some or all of the sale proceeds. In addition, the management team in an MBO will be required to enter into a shareholders’ agreement with the investor, and will have to agree to the investor receiving certain information and having the right to veto certain acts by the company.
Distractions
The stress of the sale process on the seller and/or management can impact on trading as it will inevitably divert attention away from day-to-day business issues. The key is to minimise distractions whilst ensuring the process runs smoothly. In order to do this, the appointment of well-informed and experienced advisers will be crucial. The advisers’ role is also to reduce the risk of claims being brought against the seller and management team under the reams of documents that are required whilst successfully navigating the sale process.
However, even before a sale there are things that can be done to make a company more attractive to a buyer as well as ensuring that the process runs smoothly. This ranges from making sure that the management team remaining in place after the sale have the skills to run the business going forward, to ensuring that key contracts are well-documented and in order (to avoid the buyer’s lawyers raising issues during due diligence). These are matters with which a good adviser can assist.
Despite the ongoing credit crunch, recent sales and acquisitions of training companies look set to continue. However, market conditions and sentiment can turn quickly, as can the political environment which has been a key driver for growth in the sector. As such, for those contemplating the sale or MBO of a training business, now is the time to get moving.
