How to get rid of an investor
Article Date: Nov 24 2005
Institutional relations
The good news for entrepreneurs with troublesome backers is that, in most cases, an amicable separation agreement can usually be reached and disaster therefore averted. ‘What you have to remember is that among investors everything is for sale at the right price, and it’s very rare that you come across someone unwilling to negotiate,’ comments David Beer, boss of business angel network Beer & Partners. ‘Most people become rational when it comes to money and most investors would rather have a cheque in their hands than a load of hassle.’
Institutional investors, such as venture capitalists and private equity firms, claim to be particularly rational in this way. They argue this is because they are juggling multiple investments at once and if one is causing trouble they would far rather secure some form of exit (and move on to the next investment) than end up with an unproductive millstone around their neck.
‘If you’ve fallen out with your venture capital backer you should sit down with them and ask what is it they want from you,’ Travers Smith’s Steele advises. ‘Preventing a problem from deteriorating is crucial. And before you think about replacing them, remember that venture capital firms often have the power to remove a CEO, although they tend to avoid this as its bad for their reputation.’
Emotional individuals
Individual investors can prove even more difficult to deal with, as minor disputes have the potential to escalate into genuine personality clashes. ‘There’s a lot of money involved in these situations and people can get very emotional,’ says Icon’s Bristow.
Negotiation will almost certainly prove to be the strongest weapon in your armoury. For Beer, the secret is to remain calm. ‘Negotiations have to be conducted on civil terms. If
you do things aggressively the whole process becomes very difficult.’
‘You need to look at the circumstances surrounding the disgruntled shareholder,’ agrees Bristow. ‘Identify what has changed and try to think about what it will take to buy that person out.’
Engineering the buyout
If the relationship has broken down irretrievably, a buyout is the most likely route through which an investor can be displaced. One course of action is a straight management buyout (MBO), funding the purchase either through the individual or collective reserves of the management team, or with the aid of the banks or finance houses. But this form of pure MBO is not viable if funds are not available, so in many cases an alternative backer (be it an individual or institution) will have to be identified.
Various corporate finance and business advisory firms – including Corbett Keeling, Icon and Livingstone Guarantee – can assist in this buyout process, but the problem is, as Mazars’ Millington indicates, ‘In order to replace an existing investor with new funding, the management team will need to prepare a credible plan. This must recognise the present situation, acknowledge whatever issues a company faces and be realistic. After all, any new investor will be cautious.’ That guarded approach is not necessarily a major problem in itself but it does mean that the board must be prepared to address and be patient with all the concerns an outsider is likely to have. In particular, Bristow indicates, ‘You need to prepare an answer to the key question they are bound to ask: “If this company is so good then why does the departing investor wish to leave?”.’
Fortunately, conditions are currently ripe to attract investment from the private equity community. According to KPMG’s Private Equity Group, which tracks UK buyouts with values over £10 million, transactions with a total value of £4.78 billion were completed in the first quarter of 2005, at an average value of £137 million; an increase of 28.4 per cent on the same quarter last year. Private equity individuals or firms are always looking for the right opportunities to invest, particularly in terms of already profitable, strongly trading businesses with plenty of growth potential. So if you can prove that applies to your company, they may be willing to plug the gap left in your funds by your exiting investor.
There has also been a recent rise in secondary buyout activity, where a company acquires a stake in another business from a departing shareholder, rather than purchasing directly from the business. ’Between 30 and 40 per cent of buyouts are going down this route,’ states Jim Keeling of corporate finance house Corbett Keeling. ‘This is a growing trend, probably driven by the fact there’s a lot of private equity money around at present.’
Regardless of which buyout route you opt for, it’s important to remember it’s illegal for a company to loan incoming investors cash or assist in the acquisition of its own shares.
Under pressure
Last, but by no means least, management teams must remain realistic in terms of the buyout process itself. Things may seem to be progressing smoothly, but until the process is complete there’s also a danger the picture will rapidly change. It is, as Bristow suggests, ‘Purely a matter of the personal pressure points of your departing shareholder.’ There is nothing to prevent an investor from turning round at the last moment and stating that they will only leave providing they get ‘X and Y’ in addition to what has already been agreed. In that situation, you may find they have you over a barrel and you’ll need to call your lawyers. Never take anything for granted.
