We
use this space to communicate with potential sellers and their representatives,
what we look for in a potential acquisition. If
you the reader have no personal connection with a business that might be of
interest to us but have a friend who does, perhaps you could pass this message
on to him.
Here's
the sort of business we are looking for:
1.
Enterprise
value in the region of Rs.100 crores (Rs.1 billion),
2.
Demonstrated consistent
earning power (future projections are of little interest to us, nor are “turnaround” situations),
3.
Businesses earning good
returns on equity while employing little or no debt,
4.
Management in place (we
can't supply it),
5.
Simple businesses (if there's
lots of technology, we won't understand it),
6.
An offering price (we don't
want to waste our time or that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
Normally,
we will not engage in unfriendly takeovers. We can promise complete confidentiality
and a very fast answer as to whether we have any interest. We prefer to buy
for cash, but will consider issuing stock when we receive as much in intrinsic
business value as we give.
We believe we would be an ideal partner in certain situations. One, your company
is listed and has a small market capitalisation (say Rs.200 crores or less).
Due to the nature of capital markets, chances are that the valuation being given
by market participants to your company would be below what the business is truly
worth. Such inappropriate valuations lead to the unpleasant choice of either
diluting your stake at a poor valuation or not getting fresh capital to grow
the business. In this scenario, the whole purpose of being listed, namely the
ability to raise money, gets defeated. To such entrepreneurs, we offer an alternative,
at a fair valuation.
There is a second situation, where thinking about us could be worthwhile. If
you, the senior management of a company, are considering a management buyout
of a business. Typically, such managers think of private equity as a source
of funding the buyout. If you are a management team that is looking for money
without encumbrances, we offer an alternative. As mentioned above, we do not
look to offer lessons in managing businesses. We also do not care much about
quarterly (or even annual) numbers as long as we feel comfortable about the
direction in which the business is moving and the decisions to move it in that
direction are being taken intelligently. Finally, we would not be looking to
take the company public within the next few years, to gain an exit for ourselves.
As long as the economics of the business do not dramatically change, we would
be quite happy holding on to the business over the long haul.
In both the above cases, we would prefer that there be no disruption at all
in the way the business was being run prior to the change in ownership. And
in both these situations, we would be happy to invest more capital, should the
business need it, provided we believe that capital would earn a healthy rate
of return. In short, we tend to think of ourselves as long-term owners of worthwhile
businesses, which are run by intelligent and honest people. Importantly, we
believe that an organisation culture takes a lot of patience and energy to build
and it would be counter-productive if we try to impose our own culture on the
investee company. We thus tend not to change anything, or for that matter anyone,
after making the investment.
Our favourite form of purchase is one where the company's owner-managers generate
significant amounts of cash, sometimes for themselves, but often for their families
or inactive shareholders. At the same time, these managers wish to remain significant
owners who continue to run their companies just as they have in the past. We
think we offer a particularly good fit for owners with such objectives. We invite
potential sellers to check us out by contacting people with whom we have done
business in the past.
Over the next couple of pages we present some thoughts that are specifically
intended for people who might be considering selling their family business.
Under
this section, I would like to share some thoughts with you about the factors
that you might like to keep in mind while choosing a partner in your business.
Most business owners spend the better part of their lifetimes building their
businesses. By experience built upon endless repetition, they sharpen their
skills in merchandising, purchasing, personnel selection, etc. It's a learning
process and mistakes made in one year often contribute to competence and success
in succeeding years.
In contrast, owner-managers sell their business (or parts thereof) very rarely
- frequently in an emotionally charged atmosphere with a multitude of pressures
coming from different directions. Often, much of the pressure comes from brokers
whose compensation is contingent upon consummation of a sale, regardless of
its consequences for both buyer and seller. The fact that the decision is so
important, both financially and personally, can make the process more, rather
than less, prone to error. And, mistakes made in the once-in-a-lifetime sale
of a business are not reversible.
Price is very important, but often is not the most critical aspect of the sale.
You and your family have an extraordinary business and any buyer is going to
recognize that. It's also a business that is going to get more valuable as the
years go by. So if you decide not to sell now, you are very likely to realize
more money later on. With that knowledge you can deal from a position of strength
and take the time required to select the partner you want.
Should you decide to sell, we think the Renaissance Group offers some advantages
that most other investor-partners (buyers of equity) do not. Practically all
of these buyers will fall into one of three categories:
1. A company located elsewhere but operating in your business or in a business
somewhat akin to yours. Such a buyer, no matter what promises
are made, will usually have managers who feel they know how to run your business
operations and, sooner or later, will want to apply
some hands-on "help". They will have their own way of doing things and, even
though your business record undoubtedly will be far
better than theirs, human nature will at some point cause them to believe that
their methods of operating are superior. You and your
family probably have friends who may have sold their businesses to larger companies,
and I suspect that their experiences will confirm the
tendency of parent companies to take over the running of their subsidiaries,
particularly when the parent knows the industry, or
thinks it does.
2. A financial manoeuverer, invariably operating with large amounts of borrowed
money, who plans to resell either to the public or to another
corporation as soon as the time is favourable. Frequently, this buyer's major
contribution will be to change accounting methods so that
earnings can be presented in the most favourable light just prior to his bailing
out.
3. A short-term investor such as a private equity fund. Such investors make
many such investments and the bonuses of their managers are
linked to the profit they earn by 'harvesting' the investment. Since time is
of the essence in calculating the rate of return earned, such
investors want to 'dress up the bride' as fast as possible. Their clear objective
is to auction off their stake to the public or to any other
suitor as soon as the valuation affords a handsome return to them.
If
the sole motive of the present owners is to cash their chips and put the business
behind them - and plenty of sellers fall in this category - either type of buyer
that I've just described is satisfactory. But if the sellers' business represents
the creative work of a lifetime and forms an integral part of their personality
and sense of being, buyers of either type have serious flaws.
The Renaissance Group is another kind of buyer, a rather unusual one. We buy
to keep, but we don't have, and don't expect to have, operating people in our
parent organization. The businesses we own are run autonomously to an extraordinary
degree. When we buy a business, the sellers go on running it just as they did
before the sale; we adapt to their methods rather than vice versa.
Any buyer will tell you that he needs you personally. But a great many buyers,
for the reasons mentioned above, don't match their subsequent actions to their
earlier words. We will behave exactly as promised, both because we have so promised,
and because we need to in order to achieve the best business results.
This need explains why we would want the operating members of your family to
retain a significant stake in the company. It is equally important to us that
the family members who run the business remain as owners. Very simply, we would
not want to buy unless we felt key members of present management would stay
on as our partners. Contracts cannot guarantee your continued interest; we would
simply rely on your word.
The areas we get involved in are deployment of surplus profits, which cannot
be used in the business and designing the compensation of the top man. Other
personnel decisions, operating strategies, etc. are his prerogative. Some of
our managers talk over some of their decisions with us, while some don't. It
depends upon their personalities and, to an extent, upon their own personal
relationship with us.
Should you choose us as your partner, you would know exactly with whom you are
dealing. You would not have one executive negotiate the deal only to have someone
else in charge a few years later, or have the president regretfully tell you
that his Board of Directors required this change or that (or possibly required
sale of your business to finance some new interest of the parent's).
It's only fair to tell you that you would be no richer after the sale than now.
The ownership of your business already makes you wealthy and soundly invested.
A sale would change the form of your wealth, but it wouldn't change its amount.
If you sell, you will have exchanged a valuable asset that you understand for
another valuable asset - cash - that will probably be invested in small pieces
(stocks) of other businesses that you understand less well. There is often a
sound reason to sell but, if the transaction is a fair one, the reason is not
so that the seller can become wealthier.
If you have any possible interest in selling, we would appreciate your call.
We would be extraordinarily proud to have Renaissance, along with the key members
of your family, own your company. We believe we would do very well financially,
and we believe you would have just as much fun running the business over the
next 20 years as you have had during the past 20.
Sincerely,
Abhishek Dalmia