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nOVEMBER 2009 - Guest Feature: New guidance for NEDs of SMES?

By Frank Lewis

Following publication of the Walker Review in July 2009, much has been written regarding proposals to strengthen governance in banks and financial institutions and the role of the Non-Executive. Worryingly, however, there has been too little debate — written or otherwise — regarding corporate governance and the role of the Non-Executive of companies not included in financial service, and, in particular, in SMEs.

Good governance is a complex mix, but its essence can be distilled into two factors. The first is board room behaviour: are the difficult questions being asked? Moreover, is there effective challenge, or simply an over-dependence on the management’s view? The second is ensuring that the board has a clear line of sight. If the information flow or risk management procedures are insufficient to give a clear picture of what is happening inside the organisation, a small number of part-time executives will not know what questions to ask.

Boardroom behaviour and connectedness to the organisation are inextricably linked by the fact the management needs to want it to happen. I believe this represents a vital point which has been missed by Walker; the way executive management conduct themselves is central to how both the Combined Code is applied and companies conduct themselves.

What makes a good NED?

With regard to the more practical aspects of being a NED of a SME company, my definition of a good NED is "one that ensures the business is well run but does not run the business". NEDs should look at the company as a whole – ‘take a helicopter view’ and avoid becoming entangled in day-to-day operations. The role of an NED can be summarised thus:

• Challenge the Executive Management - by asking apparently simple questions about the business, the NED can greatly help an executive team to focus on the ‘important’ rather than the ‘urgent’ and challenge commercial practice flowing from the “We have always done it that way” approach.
• Provide Knowledge, Insight & Experience - General business wisdom and experience gained from a variety of environments has huge value. Business people often learn best from personal experience or those of others.
• Raise Governance - A good NED should help to raise the standards of corporate governance within a company. This helps to ensure that executives understand their obligations in this respect and thus comply with the Code.
• Advise on Strategy - A business without a strategy is a business without a sense of direction or purpose. NEDs can assist the executive team in articulating the strategy. Therefore, NEDs must have good interpersonal skills and sound commercial judgement.
• Challenge Business Plans - Executives often produce business plans setting goals which are comfortable rather than stretching. NEDS can push, interrogate and raise the performance bar. Conversely, they should also challenge where they believe ambitions are simply unrealistic. They provide a commercial reality check.
• Mentor - One of the most important roles of a NED, especially for SMEs, is to act as a mentor to the executive board and coach directors in governance, people management, etc.
• Act as a Sounding Board - NEDs have an invaluable role to play when a company is considering decisions such as acquisitions and disposals of businesses.

The above roles do of course have to be read in the context of any statutory duty to promote the success of the company for the benefit of its members as a whole under the Companies Act 2006 – which he shares with his co-directors.

In addition, however, the NED can act as the impartial ‘honest broker’, helping to make well thought out decisions in instances where the heart wants to rule the head!

__________________________________________
Frank Lewis is a seasoned, energetic and internationally experienced Non-Executive Director & Chairman with a demonstrable track record of operational success spanning 25 years, both in the UK and abroad with growing mid-market companies. Frank is also a member of the AIM Advisory Group and the QCA International Working Group.

November 2009 - Guest Feature: Value Paradigm Shift - Was the old way the right way?

By Hans Christian Iversen

How do we prepare our business coming out of the biggest slump since the 1930s?
The value paradigm has shifted since the beginning of the crisis during the Autumn of 2007. Basic values; honesty, reliability, ethical conduct and ‘my word is my bond’ has become much more modern and relevant again, even in some aspects of banking, where it appeared we had lost it for a while.

This realignment of values will have implications on how we successfully manage and direct our businesses in the future. There will hopefully be no more, “well, you agreed this with my colleague, but you did not agree it with me and therefore it is no longer valid.”

These new rules will once again emphasise the old approach of more value for money or not paying more than you have to. This is already reflected in the retail-trade – cheaper brands are doing very well (Aldi, Lidl and Topshop) while some of the middle brands are suffering (House of Fraser, Austin Reed) and the more expensive brands are sill well positioned (Louis Vuitton).

We expect this trend to continue for the next few years and this will also have implications for your relationship with your clients who will be looking for more value in your products and services. They will also be looking to existing suppliers to provide a more comprehensive service if they are full-service organisations.

In contrast, the opposite approach seems more popular in the banking and finance arena, with a growing amount of clients opting to use specialised boutiques for the various financial services as oppose to the Citibanks of the world.

Long Term Relationships
 

Establishing long term relationships, we believe, will be key to successful business going forward. Change in the value paradigm has also reinvigorated the notion and importance of long-term supplier-client relationships built on trust, mutual respect and understanding. “How many in the banking world were thinking of long-term relationships when they sold securitised mortgages and credit card debt to secondary funds and pension funds over recent years?”

The idea of long-term client relationships and account management will be one of formulas, increasingly used in implementing the new strategies going forward, based on fundamentally stronger ethics.

Future Strategic Planning

Expect product and service life-cycles to be even shorter going forward. This will have implications on how businesses conduct strategic planning and it on how much time they will have available to implement plans and introduce new products or services.

Tomorrow’s businesses will have to become faster and more agile as the cycle of strategic planning becomes shorter requiring plans will to be revised more often. In brief, this will mean a shorter time to market and the need for a more innovative- and rapid development of- new ideas, products and services.

What are the implications for your business?

1. Old paradigm values will be more predominant in the way business is conducted going forward and you should spend more time on your old and established client relationships as this will definitely pay off.
2. Endeavours to cut costs and be fast to market will pay off going forward, but there is a need for more innovation and faster generation of new ideas as the life-span of products and services becomes shorter.
3. Continue training and development of your employees.
4. Businesses need to change the speed at which you plan and implement new strategies as the speed of change gathers pace.
5. Always be ready for more change.

Hans Christian has over 20 years experience in both line management, private equity and in management consulting on a European basis having worked for Deloitte Consulting and Roland Berger as a partner with specialisation in media, IT and telecommunications. He is currently a Director at Committed Captal Pty Ltd and Chairman of Ferrabyrne Limited.

 

September 2009 - Guest Feature: Strategic Planning in an Uncertain Economic Environment

By Hans Christian Iversen

In the past, strategic planning has meant long-term planning, usually over a three to five year period, the purpose of which has been to define long-term objectives and priorities for a business going forward.

This form of planning, which has often also included scenario planning was used in an environment where uncertainty and economic cycles were less volatile and where markets generally developed and changed at a much slower pace than today.

The present market and environment makes strategic planning and implementation even more important than was the case in the past.

The paradigm for long-term planning has changed:

• Customers want more value for their money than in the past and this will continue for the foreseeable future;
• Product and service cycles have become shorter and therefore more innovation and investment are required in new developments and services;
• The speed of change has made traditional planning tools obsolete; and
• New and speedier thinking in the planning-cycle is now required.

How must we adapt to this changing Paradigm?
1. Planning cycles need to be shorter – up to about 30 months
2. Planning objectives must be reviewed and amended more often – at least every 12 months
3. The number of priorities in the business planning process should be fewer and bigger

By altering and evaluating the assumptions for our planning every 12 months, the strategy is more up-to-date and we are able to modify our objectives more frequently, aligning with changes in the market and the wider economic environment. Strategic planning tools therefore become a more integrated part of the weekly and monthly decision making at a granular level.

This approach should enable us to more clearly prioritise business decisions in response to the ever-changing business environment. The ‘Strategic Plan’ becomes an integral and evolving document instead of a benign annual review process. The resulting business is more responsive to the ever changing external environment and able to adapt resources on a forward looking basis.

Implementation of Strategic Plans

More frequent review and realignment of the strategic planning process means implementation becomes easier and resource allocation turns into a much more flexible exercise as the market and the customer demand change. In the past, businesses would change 3 to 6 months after a market event, critically, this is no longer the case nor is it financially feasible going forward. Strategic planning must become an ongoing process, colouring the day-to-day decisions made on a frequent basis.

Hans Christian has over 20 years experience in both line management, private equity and in management consulting on a European basis having worked for Deloitte Consulting and Roland Berger as a partner with specialisation in media, IT and telecommunications. He is currently a Director at Committed Captal Pty Ltd and Chairman of Ferrabyrne Limited.

 

July 2009: The Capital for Enterprise Fund

 

GUEST ARTICLE: Direct Funding Help for Stretched SMEs - by Rupert Bell, Octopus Private Equity

Octopus Capital for Enterprise Fund provides up to £2m to reduce borrowing and inject fresh capital.

Through no fault of their own, businesses in the current economic climate are finding it difficult to secure the finance they need, and in some cases have exhausted their traditional borrowing capacity. Meanwhile, banks continue to be wary lenders, or impose high lending terms. However, help is at hand for cash-strapped businesses, in the form of the Government's Real Help for Business Now initiative. This aims to address the cash flow, credit and capital needs of UK small and medium sized enterprises (SMEs) via its Capital for Enterprise funds, so paving the way for economic recovery through support of the UK's growing businesses.

Octopus is managing the £30 million Octopus Capital for Enterprise Fund, which is part of Real Help for Businesses Now. The fund will offer between £200,000 and £2 million, in equity or mezzanine funding, to UK based SMEs with existing cash flows and genuine growth potential, but which are currently over-geared or unable to access additional external funding.

In these difficult times, up to £2 million of external funding can be a lifeline for companies; to ease working capital pressure, to pay down expensive bank finance and buy a little breathing space, or to support growth plans, such as an acquisition or the opening of new sites.

Over the course of 2009 and 2010, Octopus expects to invest in up to 25 viable UK companies, providing both fresh capital and vital knowledge and experience to help firms grow through the recession and emerge stronger on the other side.

Octopus is able to provide ongoing support alongside funding. As a leading UK investment specialist for UK SMEs, including being one of the biggest VCT and EIS funders in the market, Octopus brings extensive experience in successful partnerships with entrepreneurial management teams. It gives comprehensive support, from establishing appropriate financial controls, to strategic planning and corporate governance, through identifying and executing acquisitions to long term exit planning. In these ways, Octopus helps companies to anticipate and address the challenges of growth and expansion.

The Octopus Capital for Enterprise fund welcomes applications from qualifying companies. To apply for funding, all applicants must have their principal place of business within the UK or be able to demonstrate why an investment will be of tangible benefit to the UK. Additionally, all applicants must meet the EU definition of an SME, namely:

- Employees less than 250

And either:

- Turnover less than or equal to 50 million euros; or
- Balance sheet total less than or equal to 43 million euros

If you would like to find out more about the Octopus Capital for Enterprise Fund, or discuss a potential investment opportunity, please contact Rupert Bell on 020 7710 6466 or rbell@octopuspe.com

 

April 2009

Planning for the Long Term. And the week after...

A little over a year ago the world changed. Cash became king, the global economy went into freefall and the full force of what has loosely become known as "the Peston effect" was coming into fruition. As confidence in the market fell, Robert Peston blogged, sermonized on the radio and jumped up and down on our television screens professing global depression on a scale never seen. Yes he was right, they were all right. But journalists certainly did nothing to help confidence.

Fast-forward to 3 April 2009 and the G20 summit. Gordon Brown proclaimed it the "day that the world came together with a plan for global recovery and reform", marking the end of the Washington consensus. US President Obama added, "today we have learned the lessons of history and agreed on a series of unprecedented steps to restore growth" as G20 nations committed $5tn, (that’s a five followed by twelve zeros, or enough dollar bills to stretch from earth almost to the sun) in funding by 2011.

Although still largely negative, journalists now seem to be taking incremental steps to find positive economic stories to report. They pounced on the story that Nationwide had recorded a 0.9% rise in the average house price for the first time in 16 months (albeit that Halifax had recorded a 3% fall in the same period). Headlines brandished details of how JP Morgan and Citigroup had beaten forecasts - they even heralded the Bank of America's return to profitability; even though it later proved a bit of a damp squib. Recent M&A activity has seen Coca Cola take a minority interest of between 10-20% in Innocent, the smoothie maker for £30m, and Oracle has announced a massive $7.4bn deal to buy Sun Microsystems.

Can we take this to signal the end of it? It’s probably too early to tell either way, but there is an apparent changing tone amongst the media. Having said that, it appears that only the Daily Mirror could find something positive to say about Chancellor Darling's Budget yesterday.

Markets will return (in one shape or another), when that very human emotion, 'confidence' does. For now, accepting we can't control the headlines, let alone global economic trends is something we just have to swallow. Does this mean as business leaders that we can only afford to sit on our hands and respond passively? An obvious rhetorical question.

It is possible to tackle the crisis from a 'bottom-up' rather than a 'top-down' perspective. In a recent McKinsey survey more than 80% of top Executives are taking a different approach to strategic-planning in 2009; reigning in capital spending, whilst being more dynamic in their approach to strategic planning. Businesses which weather the storm the best and emerge leaner, meaner and more agile are likely to be those with management teams who regularly assess and realign short-term goals with a long-term strategic vision.

A simple 'vision to survive', put simply, is just not good enough. We all accept global markets have changed, yet many managers have not yet grasped the extent to which this has had an impact within their own marketplace. A full internal and external strategic review is likely to reveal opportunities in both new and existing markets, address competitors and indicate how to deploy resources more effectively.

Equally, management of companies in a strong financial position must ensure they don’t fall victim to 'reckless caution' in the form of complete risk aversion. Accepting some risk is essential for growth – if it can be correctly aligned with an overarching strategic vision. Identifying targets for acquisition, tracking the market, diligent scenario planning and in-depth analysis should allow management teams to recognise the best time to capitalise on the downturn. Ultimately it is this which will make a difference to the value an acquisition adds.

 

March 2009

The SME Sector is Both the Past and Future for Corporate Finance

The current economic climate has given rise to a plague of “not since” reporting. Whether it be house prices, interest rates, unemployment statistics or English sport, many journalists are using their history books to claim that conditions have “not been as bad as this since” last Tuesday, 1967, or records began.

The M&A and private equity world hasn't been looking back, except with longing for when deal volumes were higher and portfolios were in, ahem, better shape. A couple of current M&A trends though, do have their roots firmly in the past.

Firstly, there is a small but growing return of private equity players looking again at the SME market. Partly because that is the market in which they made serious money in the 1990s, partly because equity houses have drifted up in deal size so there is currently less competition in the lower mid-market and partly because there are fewer big deals to be done as the debt markets won't support them at the moment.

Which brings me to retro trend number two. As the reader knows, the banking world is very different to how it was two years ago. Indeed, perhaps it is more like that of, say, a dozen or so years ago. Not too many banks are equipped and willing to support leveraged buy-outs and debt levels are more at two to three times EBIT (or EBITDA if you're feeling a bit racy). Consider that for a moment, because it makes sense – debt should, in general, only be lent if it can be serviced. And by serviced, I mean that the cash flows of the business can support interest and repayment of debt. Probably.

At the larger deal end, there was debt that was engineered, to not be repaid because it was anticipated that there would always be another bank around to refinance it. And there were…right up until the point when there weren't.

There are parallels in the equity market. However much you try to refinance debt or sell on an equity stock, there have to be some fundamentals supporting the price. In the case of debt – interest and repayment; in the case of equity – dividends, both of which should relate back to the projected cash flows of the underlying business.

Past performance isn't a great guide to the future (which makes one wonder why so much money is spent on backward-looking due diligence), but it does colour all of our decisions. Particularly at the moment.

With Blur reforming, Oasis winning Best British Band at the NME awards and debt levels as they are, it’s a 90s throwback.

Despite, and perhaps because of the gloom saturating the headlines, the SME sector has plenty of potential deals. Meta remains focussed on doing the MBOs that are now possible, making the opportune strategic acquisitions and acting for vendors who have valuable companies to sell.

 

February 2009:

Yet More Awards for Meta: Insider Dealmakers Awards South East 2009: ‘Deal of the Year’

Meta is once again celebrating success. As well as receiving the Gatwick 'Deal of the Year 2008' Award for its involvement in the MBO of James Villa Holidays Limited, we received news last week that we have also been presented with the Insider Dealmakers 'Deal of the Year 2009' Award, once again for the role Meta Director Peter Counsell played in the James Villa Holidays transaction.

Supporting South East SMEs

Businesses which were once sound and profitable are having their cashflow strangled by escalating restrictions on lending and credit. The importance of credit to any company’s working capital cycle is patent. However, as the pressures exerted upon the banking system by the reluctance to lend to each other filter down, SME cashflows are being severely impacted. Banks and lending institutions are increasingly relying upon obscure covenants buried within their Terms and Conditions to drill down their exposure and limit the availability of credit to good businesses.

Often, companies facing problems don’t realise until it’s too late.

When they do realise, regional and local branch managers with whom a strong relationship has often been developed can no longer help – internal edicts mean the company is transferred up the food chain to debt recovery teams with initial fees for panel advisors starting in the region of £75,000.

The demographic of South East Business is such that there are few large corporates, but many SMEs. It is the latter for whom this threat is most prevalent, often spelling ‘the beginning of the end’.

The question therefore begs, “how can the wider community of professionals help?”, the key appears to be to engage in effective monitoring and communication with clients and to work in conjunction with local and regional bank managers to help manage the situation before it becomes irreversible.

Hope on the Horizon

The good news is there are banks out there who are willing to lend and are actively seeking deals. The details also continue to trickle fleshing the bones of the government’s £20bn support package for SMEs.

The Enterprise Finance Guarantee Scheme (EFGS) will be available to SMEs with a turnover up to £25m to borrow between £1,000 and £1m where businesses without a strong balance sheet to offer up as security can get the government guarantee 75%, with the remainder secured on the balance sheet. The money can also be used to replace existing loans and overdrafts, offering the flexibility to re-schedule borrowing.

In addition to regular capital and interest payments to a lender and any arrangement fee which they may charge, a premium is payable to the Department for Business, Enterprise and Regulatory Reform equivalent to 2% per year on the outstanding balance of the loan, assessed and collected quarterly in advance throughout the life of the loan. A discount of 25% will be applied to all premiums due and successfully collected during 2009. The new scheme will run for between one and ten years replacing the old one which only ran for between three and five years.

Meta is keen to help businesses help themselves and avoid ending up in the sin bin of the banking world. Find out more about Meta’s approach to Business Turnarounds

 

January 2009: Happy New Year from Meta Corporate Finance

 

The New Year comes at the same time each year (naturally) and brings with it certain baggage. It marks the end of one calendar period and the beginning of another. We all look back and attribute events and their consequences to a particular year, rather than to a non-specific period. Television programmes are made to celebrate “I Love 1983” and not “ I am particularly fond of much of the autumn and winter of 1983 and early 1984”. We expect that turning the page on a new calendar does, in itself, bring about change. This is madness, just as mad as drawing valid conclusions about a company based on one discrete/discreet year’s worth of financial statements.

At the peak of the tree of madness is the New Year’s Resolution. Other than those individuals that are truly driven (and would have made these resolutions in any case), the annals of history are littered with cases of resolutions that are made in the short dark days of midwinter, but are tossed aside by Valentines Day.

This year, I expect that there will be thousands, if not millions, of people, both business owners and employees, who will be hoping that the change of the year will bring a change in fortunes for the UK economy. Similarly there may be thousands, or millions, of people that will make resolutions to stop smoking, eat less, run more, whatever. Somewhere in between these two camps lies some sanity. Both camps would like to look back at “I Love 2009” in the future and for the top story to be one of recovery following a recession in 2008.

For that prophecy to be fulfilled requires action, not just hope or resolutions. Inaction drives further recessionary pressures. For most people, the only thing that they can control is their levels of activity. The outcome is still uncertain, but the odds are strongly in favour of the active.

The current phase of the economy has brought change to the marketplace for corporate transactions. Some sectors are more resistant to downturn than others. Some segments have a cycle which is predictable and independent of high street spending. Some businesses are more able to raise funds than others. Some businesses with ready cash are looking to acquire, either because they are calling the bottom (or near-bottom) of the market or because their strategy is to augment existing activities with more robust sectors.

The current phase of the economy has brought some very difficult times for some, but significant opportunities for others.

All, though, must remain active.

 

Gatwick ‘Deal of the Year 2008’ Award: James Villa Holidays Limited

 

In March 2008 James Villa Holidays Ltd, the UK's leading tour operator specialising in villa holidays, was acquired in a management buy out ("MBO"). The deal subsequently won the prestigious ‘Deal of the Year Award’ at the ‘Gatwick Deal Awards 2008’.

Acting for Meta Corporate Finance Limited, Director Peter Counsell project managed the successful MBO led by Tony Wheble, the company's Chief Executive and his management team Jo Afridi (Overseas Director), Simon Grigg (Finance Director) and Richard Moger (Director of IT Services) and financed by Bank of Scotland and a small group of private investors.

Tony Wheble said, "The management team are delighted to have the opportunity to lead the business through its next growth phase. James Villas is a well known brand with a loyal and expanding customer base. We are confident that further exciting growth streams exist that will help us to develop the business further in the UK and internationally. The potential to become a significant brand in the self catering market is something the whole team are motivated by and focused on."

James Needham, Company founder and former majority shareholder started the business in 1984 from the spare bedroom in his house renting villas in Lanzarote. Today, James Villas has a turnover approaching £60m catering for over 120,000 passengers providing a portfolio of over 2,500 villas throughout the Mediterranean and Florida. The Company employs 100 staff in Maidstone, Kent in addition to a 60 strong team overseas. It operates 3 websites in the UK, Ireland and Germany along with a single retail outlet within the Bluewater Shopping Centre.

Mark Edwards, Bank of Scotland Director in Gatwick said, "James Villa Holidays Ltd has a proven and highly experienced management team with a clear strategy and excellent customer proposition. We are extremely pleased to be a chosen partner to help the business through its next growth phase and look forward to working with such an established and respected business.”

The Business Magazine Deal Awards Website

 

OCTOBER 2008

Is Economic Downturn a Deal Breaker?

As revenues slow, business focus naturally shifts to concentrate on maintaining balance sheets and cutting costs. Despite the so-called ‘credit crunch’, the most dynamic companies pursue a different and more aggressive strategy during downturns; seeking to make acquisitions. Equally, business owners and management teams should still consider buy-outs and buy-ins.

Banks are actively seeking secure investment opportunities to offset toxic debt and Private Equity firms still have a wall of cash to spend. Business owners should not discount bids from strong management teams and should look to initiate MBOs themselves as the most confidential way to sell their businesses.

The crucial factor in getting such deals done is obtaining the right advice from trusted advisers; able to support shareholders and management teams alike.

On completion of the recent MBO of James Villa Holidays, Peter Counsell, Director of Meta Corporate Finance Limited commented “James Villas is the leading brand in its sector, due in no small part to the skills and experience of the management team. The pragmatic approach of the team and its funders will stand the business in good stead as it embarks on its next phase of growth under new ownership.”

In September 2008, this deal received the Gatwick Deal Awards ‘Deal of the Year’ with financiers, Bank of Scotland and Investec Growth and Acquisition Finance backing the experienced management.

This sizeable transaction is an ideal example of how investors are ready and willing to back deals where the business concerned demonstrates sustainable growth, underpinned by solid incumbent management, who are themselves more likely to continue to deliver pregnant growth than a trade purchaser.

Corporate Finance activity in the South East has a strong pipeline that does not seem to have been distracted either by a less clement banking market or recent tax changes. Indeed, the number of deals reported in the region in 2008 (excluding London), has remained consistently in the region of 100 per quarter over the first three quarters. The most prolific activity centres around financial services transactions – particularly insurance. Having recently completed a complex financial services transaction ourselves, we can testify strategic investment is ample in this sector for good management teams too and we expect to work alongside the team to achieve a significant exit in the near future.

Despite this period of potential economic downturn, South Eastern business (well served by transaction specialists and regional investors) may well provide an opportunity for strategic investors to capitalise on the down-market.