- Achieving an exit starts with building a business to be proud of
- Think about how the business will endure and scale past the exit or IPO
- Get your house in order and use failed sales attempts to prepare yourselves
You can listen in full here.
The companies Notion invests in share much in common: they all want to build businesses that dominate categories, that scale and endure. And at some point in their journey, they will want to realise the value of their hard work, allowing themselves as founders, and us as funders, to realise our investments. They may end up listing on the public markets or being acquired – the latter being more likely for European companies.
That exit may well be far in the distance for many founders, even as they achieve significant success. Some people will say, “build a great business and the outcome will take care of itself” and while that is true to an extent, we also believe that long term readiness can have a significant and positive impact on that outcome. We call this “The Art of Exiteering”; taking the long term view, in order to maximise the value of an M&A or IPO. You can read more about ithere.
Catherine Birkett is the CFO at Gocardless and was previously the CFO at Interoute and has plenty of experience in long term exit planning. When she joined Interoute in 2001 it was effectively bankrupt but over the next 17 years grew to £700m in revenues, and £170m in EBITDA. Catherine took over as CFO in 2004 and over the following 14 years oversaw the growth in revenue, a return to profit, completed 12 acquisitions and was integral to the sale ofInteroute to GTT for $2BN in 2018.
How do you respond to the assertion: build a great business and the outcome will take care of itself?
Catherine believes that if businesses are only focused on the exit from day one, they may never get there, but they do need to have that end-game in mind. “We were lucky at Interoute that – while technically bankrupt – we did have great assets and very supportive shareholders.” Those investors had sunk a lot of money into the business before Catherine and the rest of the management team joined. The team focused all their efforts in the early days on simply building a great business. “We did that in two ways. Firstly getting customers on board and secondly, caring for those customers.”
Interoute had a good telecoms network with very high bandwidth – it was the last one to be built in Europe – and that gave them something different, but it was the people that really made the difference. “We concentrated on building a business that really cared for those customers, through the people we hired and the culture we built.”
They did have an eye on the end game as Catherine describes it: “but none of us planned for it to be 15 years in the future” We were all thinking of a five to seven year journey, and it ended up double that.” But they focused on the basics: winning customers and treating them well; growing their revenues; and dealing well with their shareholders. “In the later phases we did, of course, put more focus on exiting the business, but at the early stage we just focused on building a business to be proud of.”
Positioning a business to maximise long term shareholder value from day one
Catherine believes the starting point for building a business, to maximise long term value, is to consider the inherent long term scalability and reliability of the product and the business. “Whether you are acquired or you IPO the business needs to continue to deliver value long after that event. It may be the end for you as the leaders, but it is not the end for the business.”
Next founders need to think about how different they are and what edge that will give them and build the right ethics in the business: “hiring good people and investing in them is the lifeblood of your business”.
Once companies have reached a degree of scale they need to think about what you will need to have in place to support the story of the business: “having robust financial systems and rock solid data is then critical, says Catherine..
Practice makes perfect.
Often a successful IPO or exit is preceded by some failures, when the story didn’t land, the numbers didn’t stick or the timing was just off, which, as Catherine explains, is what happened at Interoute. “We were around quite a while and had a couple of failed sale attempts when the numbers didn’t really stack up, but because of those failures, we were able to think through the data that would help the exit story and to get the opportunity to build a history.”
Interoute also went through a partial sales process and brought in some private equity and Catherine is adamant that the scrutiny the PE firm put them under was invaluable, as were their own acquisition experiences. “In 2015 we completed an acquisition of a business that was ⅔ the size of Interoute, so we had to present the combination of the two businesses and make sure the data was wholly consistent. We spent a lot of time making sure our data was in great shape before we launched the sale process.”
With the business at last where they wanted it to be, the management team could think of putting a sales process in place.
Over the years Interoute had talked to many buyers but nothing ever came of the discussions. Then, with the PE firm on the board and a major acquisition under their belt, they had taken the business to the next level. “Through the integration of the two companies and achieving the synergies, we at last got to the business to the place we wanted, generating free cash flow.”
They took advice from their PE team, worked through an enormous amount of preparation, engaged two banks and laid out a sales process. “We had two banks engaged: Credit Suisse in London and a boutique bank called Evercore, that specialised in telecoms. These two firms ran the mandate jointly and we went for it.”
They went out to a lot of potential buyers with an investment memorandum and ran a tight ship. “We had a tight timetable and more than twenty bids which we shortlisted to ten buyers and took them all through full DD.” While that sounds like a lot, they were well prepared on financial DD, which had been undertaken by KPMG and commercial DD, which had been prepared by OCC. “We had done a lot of the work needed well in advance. This level of preparation made a big difference to our ability to run a tight process.”
Next they did ten management presentations in one week and ran ten separate Q&As. “We held the buyers to 60 questions each and they all stuck to it. And everyone could see everyone’s questions and answers. This really helped us demonstrate it was a competitive process as well of course it stopped people asking the same things.”
They then went from ten contenders to three second-round bids, which all went up significantly, in large part because of the quality of the management team and management presentations. “We thought very carefully about who presented in large groups, and who was better one on one, and how our story was told.”
In previous attempts to sell the business, Interoute had been tripped up on a couple of things, for example on trying to explain their revenue. Catherine explains: “We sold long term contracts, which we recognised monthly, but people paid in different ways and we didn’t do a very good job of explaining this and how we reconciled bookings with revenue. We sorted all that out.”
Being able to show that everything stacks up on the numbers – from your bookings and sales, to revenue in the P&L is critical.
They had also put the work in on the balance sheet as they had a lot of deferred revenue that needed to be explained. Catherine continues with advice that will resonate with any SaaS CFO. “For anyone selling annuity revenue, paid in advance, with therefore significant deferred revenue on the balance sheet, then being able to explain it as either “cash value” or a “debt like adjustment” is a big issue.” Ultimately Interoute were able to show that their deferred revenue was refreshing, as most contracts were renewing, and so simply replaced one annual contract with a replacement contract the following year, so the deferred revenue on the balance sheet could be considered working capital.
Three things that stood Interoute in in good stead in the sales process were:
- The quality of the management team was critical. “We had a great team at Interoute, as we do at GoCardless”;
- The quality of their financial data, “we had put a lot of work into this in advance; and
- An exceptional legal counsel, “who made sure we knew where our risks were, which we presented in the right light.”
What could have caught you out?
One thing early-stage companies do need to think about is international legislation.
Interoute was good at this. “If we went into a new geography we had the appropriate licences, we thought about tax and VAT. Thinking back to the deal we did with EasyNet, a US tax issue almost destroyed that deal. It’s so easy to ignore international tax issues, especially at an early stage, but it can be really problematic if not done right.”
How can CFOs balance the demands from within venture-backed businesses to invest for growth, with the need to control costs?
Interoute would never have been successful if they had not taken risks and the same applies to any ambitious business. “Gocardless is a fairly advanced business, but we too have to take risks and invest for growth. You have to weigh it up and understand the downside.” Catherine takes the approach of thinking “what’s the worst case scenario of taking this course of action? I may not voice that, but I will think through the levers I will pull if things do go wrong. Sometimes I will voice that strongly, other times less so, but it’s always there at the back of my mind. “
Growth businesses need to take risks, but Catherine counters that by developing a cost sensitive culture so that everyone is encouraged to treat the business like an owner.
Helping the business to balance risk and reward is the role of an effective CFO, “you have to learn to listen, air your concerns, highlight the risks and then back the team in their plans, but always trying to ensure you have enough cash for the next 12-18 months.”
The role of a CFO is strategic to the business, and Catherine clearly loves it. “At the end of the day, the CFO always has to strike a balance, speak their mind and be aware of the lines that you cannot cross. Don’t be afraid to ask for advice – act with integrity but be prepared to take risks.”