HR & Management

How to buy back your business

7 min read

09 October 2011

Rod Flavell delisted FDM Group from AIM last year in a £39.4m deal backed by Inflexion. The process took two gruelling years and cost £4.5m in advisory fees. Here’s how the management team did it (and made it out alive).

I set up FDI (as it was known then) in 1991, when I was 33. We launched the business with £60,000 worth of share capital and worked from my attic for two years before moving to a “real” office in Brighton. With the exception of the dotcom collapse, we’ve had a very good run: we’ve been profitable for 18 of the 20 years we’ve been in business. 

Until 1996, we focused on placing IT freelancers into businesses. Then, we bought  Mountfield Software, changed our name to FDM Group and started training new graduates to become IT consultants at our academy. Today, our clients range from John Lewis and Betfair to UBS and Sky.

We made the decision to float FDM on AIM in 2005 – some of our directors were in their 60s and 70s, and looking for a way to cash out. At the time, we were making £1.7m on a £40m turnover. We floated at 78p per share, with a valuation of £17.5m.

The plc route back then was very popular. We raised £8.5m in total: £5.5m of old money to pay people out (I took £1m off the table), and £3m of new money. 

For the first two years, we were going great guns: our share price was growing, and peaked at £1.45. 

But then things started to turn ugly. AIM was lightly regulated and suddenly there was an explosion of commodities companies coming to the market. AIM became swamped and our share price started to flatten.

When we first floated, the general perception was that £5m of Ebitda got you a £50m valuation, which would move you up a category of investor (to the likes of Deutsche Bank and UBS). But then that changed: £100m became the new goalpost.

Worse, our valuation plummeted. Even though we were now pulling in profits of £4.2m and were performing better than when we first listed in 2005 (we’d gone from £3m of borrowings to £10m of cash, no debt), we were valued for less – £13m. Ridiculous!

By 2008, our share price had dropped to 60p. I was doing 30 meetings twice a year with fund managers, but no-one was biting. I had eight per cent of my wealth tied up in this thing. And for my employees with share options, there was no real incentive to keep going. 

I started to think about a way out of AIM. The answer? Private equity. 

I set up a few meetings with VCs. Talking to them was a breath of fresh air. As a public company, you have to be cautious about growth. If you say you’re going to do 22 per cent growth, that’s exactly what you have to do. In the PE world, on the other hand, growth is aggressive. If you turn around and say you want to take £1m off the balance sheet to expand into North America, you get a pat on the back.

With our share price under water, we had to find a deal that would convince our shareholders and public investors to sell. 

We were approached by an organisation (I can’t name names) who said they would offer £1.20 a share – but it was January 2009. They got nervous, wobbled, and decided to back away.

I then had to go through the process of producing end-of-year accounts so, for the next few months, I was up to my armpits in meetings.  

In May, our advisers – Ernst & Young – put me in touch with Inflexion, the private-equity house behind fashion brand Jack Wills and Ilchester Cheese. I liked them; they liked us. They offered a full equity bid for the business – this time at £1.25 a share.

So in October, we put together a formal bid document to the market. Don’t underestimate how long and gruelling this process is. We didn’t leave Eversheds’ offices for 24 hours – no joke. There were seven sets of Silver Circle lawyers involved, plus our “rule three” adviser, Brewin Dolphin.

To muddy the waters, one of our investors attempted to sandbag the deal with a hostile offer of £1.35. At the same time, we got news that HSBC would fully fund our bid with long-term debt finance. The race was back on to buy the majority of voting stock.

Inflexion formally announced the take-private acquisition of FDM in February 2010, at  £1.50 per share. The business was valued at £35m, and our original shareholders doubled their money.

The whole process of buying back the company had taken two years, three formal offers, and a whopping £4.5m in advisory fees.

If you’re thinking of delisting your company, my advice is this: make sure your management team have balls of steel. If you have one bad apple in your group, it will poison the barrel and you’ll lose your resolve to press ahead with the transaction. 

Second, make sure you trust your PE partner 1,000 per cent – and be absolutely confident of your company’s growth prospects. 

In our first full year as a private company, FDM doubled Ebitda to £11.2m. Turnover hit £82m.

Since delisting, we’ve also opened offices in Zurich, Hong Kong and Singapore. Plus, we’ve launched FDM academies in Germany and the States (in JP Morgan’s former penthouse flat on Wall Street, no less). 

Those two years were like doing an unofficial MBA. Was it worth the grey hairs? You bet.

Interview by Kate Bassett.