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Selling into VC & PE owned businesses

Selling in the 2020s requires different approaches, different skills and different thinking.  One of the most important areas to consider is the ownership structure and financial drivers of the customer.  

This is particularly true if you are selling to companies that have received Venture Capital or Private Equity investment.

Here we give an example of selling advisory services to a Venture Capital owned business and looks at the lessons that can be drawn.  Some details have been changed to preserve anonymity.

The company was a specialist manufacturer of hardware and software into a niche market.  It was originally a division formed by a multinational. They lost interest and sold it to an entrepreneur.  

Product development generated strong profitability: £20Million from £80Million turnover. A further £20Million was retained within the business even after operating a company jet and helicopter!  As the products matured profitability dipped; so the entrepreneur sold it to the three top managers who had developed the concept in the first place.

They were able to introduce further new products and while profitability stayed high it never reached its original peak. The three managers sold the business on to the next tier of managers via an MBO funded by a VC house.

Without the product development brilliance of the founders and the aura of confidence that went with it, the performance dropped from £80Mn sales and £30Mn profit to £40Mn sales and £2Mn profit.  This had not been in the investors’ plans! Heads rolled and the management team were replaced.

The figures looked like this:

Sales:            £40Mn

Direct costs:        £10Mn

Gross Profit:        £30Mn

Fixed costs:        £28Mn  (includes R&D)

EBITDA:        £2Mn   

The new MD held 5% of the shares and three other directors 2% each. 10 other senior staff held 14% between them. The investor held the remaining 75%.

They took a number of initiatives including starting to charge for support and then went out to the market to look for a sales performance improvement solution.

The solution cost £200,000 but was usually sold to much bigger companies.  The only way to sell on this occasion was to build a business case:

The selling team realised that selling “a product” was not going to work so they worked with the VC house on the following approach:

They established that the PE house was exposed to the tune of £20Mn+.  This was money they had invested in a business that was, to all intents and purposes unsaleable.  They were considering walking away from their investment.

They confirmed that a sale price of 5xEBITDA was acceptable.

So the argument goes like this:

Increase sales:        £40Mn -£50Mn

Direct costs rise:        £10Mn – £12.5Mn

Gross Profit rises:        £30Mn – £37.5Mn

Fixed costs unchanged at:    £28Mn       

EBITDA rises:        £2Mn – £9.5Mn

Exit price rises:         £0 – £47.5Mn

Look at what happens for the shareholders:

The private equity firm moves from £20Mn loss to >£35Mn gain

The MD stands to make nearly £2.5Mn

The 3 other directors stand to make nearly a £million each

10 other managers will share over £6 ½ Million

The key to selling a solution into this kind of situation was:

  1. Recognise there were two decision-making processes – the investors who wanted an improved result but would not dictate to the directors; and the company itself.  At the first meeting with the MD he asked “So who’s your client? Them or us? Be very clear if we go ahead I’m your client not them!”
  2. Ask the right questions (not just product and commercial questions but financial questions e.g. when the exit was planned, current situation, who owns what)
  3. Demonstrate the impact the solution can have on profitability and thus on exit price.  Everything needs to contribute to the value of the business rather than just this quartree’s or this year’s result.

If you want to understand more about the difference between PE and VC funded businesses you may find this link useful.

If you are involved in selling into PE or VC funded customers or if you are involved as an investor or investee then the SalesLevers team has very specific experience and expertise in selling in this environment.  

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