A tale of two deals

To maximise ‘to make as large or great as possible’

To optimise ‘to make the best or most effective use of a situation or resource’

Some years ago, I was managing a UK gaming business which was listed on the AIM market. It was performing very well, a healthy acquisition strategy was building revenue and profit, we were regularly opening Greenfield sites and like for like revenues were growing strongly. Double digit revenue growth in a business where the cost base was mainly fixed meant that our trading profits were growing exponentially and because of this our share price was buoyant. Then came an unsolicited offer from a strategic buyer to take the business private. This offer naturally generated much debate around the Board room table. After lengthy negotiation, the Board recommended that we should accept the offer, Board members taking the view that over two years shareholders would see their investments triple in value and that this was an ‘optimum’ time to dispose of the business. The decision was supported not only by the Board but also by our majority shareholder (and most of our other shareholders). However not all shareholders agreed, and some were concerned that we were selling the business too soon, that there was still ‘gas in the tank’ and that we should continue to pursue our growth strategy, we could push the price to the max. We listened to this argument, revisited the decision (to sell) but ultimately stuck to our guns and the business was sold, the price delivering very solid returns to our investors (one of whom met me in the street following the deal completion and kissed me!). Later that year the implementation of the much-publicised UK Smoking Ban meant that the new owners saw their revenues tank. The former positive effects (of a revenue uplift) on trading profit now meant that the negative effect of the revenue downturn was vicious and the impact on sector wide profits dramatic. As was the effect on business valuations…

A year passed and I was having dinner with an old friend who, along with two colleagues, had built a very successful Private Equity backed business and this business was under offer. My friend was delighted and told me that for him the journey was over, he was going to make a significant amount of money from the sale and now planned to retire. All was right with the world, and we drank to that, but… my friend told me that he still felt that it was going to be possible to just squeeze a little bit more value from the Acquirer and that he and his colleagues were going to hold off signing the ‘Heads’ until a slightly improved price was agreed. He felt that although they did have an optimum price they could still ‘max out’ the price and squeeze a few more pounds out of the acquirers. After a few more weeks of wrangling the new price was agreed (collective sigh of relief ), Due Diligence was completed, and the Management team duly arrived at their Lawyers offices for the Completion meeting. But the Acquirers didn’t show up (this was 2008) saying that they didn’t quite have all their ducks in a row but not to worry, they would be there the following day, and the day after and the day after and then after the final no show the acquirers walked away from the deal completely, their backers having got cold feet. Then the world economy started to tank, businesses everywhere went into reverse and my friend’s business (which was highly leveraged) also went into reverse and despite much financial maneuvering was ultimately sold off by its main creditors. My friend and his two colleagues ultimately left the business just holding their redundancy cheques, no big pay day, no celebration, no early retirement.

Now we all know that success in business is usually a combination of luck and good timing. Luck that you were in the right place at the right time (and also worked your proverbials off!) but also that your sense of timing has been good. Whether that is timing in terms of acquiring the business, bringing in the right level of investment , bringing the right people and products to market, or ultimately determining the right time to exit the business. Of course, the exit can be your personal exit (cashing in your options or sensing when your former ‘inspirational’ leadership is starting to wane and that maybe it is time to spend more time looking at travel brochures than P&Ls) or simply time to sell the business on, exiting shareholders whilst ensuring that you are leaving enough meat on the bone for the next owners to show a healthy return on their investment.

In all things there is an optimum time to act, and this certainly applies to business. The trick is to know when that is. Maximising profits, maximising turnover, maximising the hours spent investing personal time in the business is a strategy that only works for a relatively short time. Maximising anything comes at a cost and like constantly running an engine at the red line of the rev’ counter can have ruinous consequences. It can damage the business (or your health) in all sorts of ways and as in the case of my friend, can have disastrous consequences.

Experience and observation have taught me that the key word in business is ‘optimisation’ and it applies to everything that you can control and for those things outside your control you need to ensure that others clearly understand your perspective.

I am sure that there will be some macho managers reading this who will take the Gordon Gecko view that ‘optimisation (as opposed to lunch!) is for wimps’, well I would like to think that most people that know me also know that I have never accepted anything less than excellent performance from anyone and (for sure) there are times in business when you need to press the pedal down and hit maximum revs, but you also have to know when to ease off knowing that an optimised business, or life, is much more sustainable. Failure to understand that principle means that you run the risk of blowing up the engine and sitting on the commercial equivalent of the hard shoulder with nothing but a smoldering wreck to show for your efforts.

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