Private equity can be a double-edged sword. On the one side, it adds financial muscle and experience that can enable a business to expand its operations, become more efficient or adapt to difficult markets. On the other, it can lead to a loss of a control, overexposure to debt and, in the very worst cases, asset-stripping.
It’s important to know what to expect from a private equity partner and to have an idea of what will happen when they exit, usually three or four years down the line. Sometimes, it can be more than you bargained for, as car valet and automotive services company MotorClean found out.
MotorClean first took on private equity backing in 2005, when the longstanding leadership team of David Warren, Paul Cranwell and John Hammond conducted a management buyout from the retiring founder. Lloyds Development Capital took a 54% stake in the original deal, appointing their own CEO, while their three buyout partners took joint MD positions and shared the remaining 46%.
The Fullfield Group (Trading As MotorClean) In Brief
HQ: Laindon, Essex
Employees: 300 (plus 2,000 contractors)
Turnover: £50.2 million (2017)
Lloyds exited in 2010. The management trio were considering buying full control of business, but decided that would be too risky due to the market volatility caused by the financial crisis. Instead, they cut a deal with Matrix private equity, which took on the controlling stake (this was reduced to 48% after its own management buyout in 2013, when Matrix was renamed Mobeus Partners).
The arrangement was comfortable for both parties. Matrix brought stability to the business in turgid times, while MotorClean was seen as a high-reward, relatively low-risk investment.
While LDC invested in MotorClean with a three to five year time horizon, Matrix was unusual in having no set exit date, rather looking to seek its return once the company had reached a certain size.
Eager to see a return on investment, the then CEO pursued strategy of aggressive expansion through acquisition, backed by private equity funds. Turnover doubled between 2013 and 2016, and the company expanded its operations with the establishment of a facilities management division alongside traditional valet services.
However, while the three MDs continued to have a congenial business relationship with their private equity partner, they soon started to disagree about MotorClean's strategy. Cranwell, Warren and Hammond became concerned that the company's reputation within its core market would be damaged as new acquisitions were quickly integrated.
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They were also worried the business would be stretched financially. Between 2011 and 2016, MotorClean’s parent company The Fullfield Group had nearly doubled its turnover from £22 million to £50 million, but this was largely funded through borrowing - at one point the business was left paying a blended interest rate of 22% in debt repayments.
'We were competing at a level that we wouldn't want to ordinarily,’ explains Cranwell. ‘The driver for that growth was that we were told it would create value, but it almost became grow at all costs.’
Despite favouring a more organic approach to growth and having a 52% stake in the business, the three MDs found it hard to resist the momentum. ‘It might look like you have a controlling interest, but when it really comes down to it you don’t, because they are the people investing millions of pounds,’ says Warren.
By January 2018, keen to drive their own furrow and increasingly disillusioned with the direction of the business, the three MDs decided it was time to take back full control and approached Mobeus with a view to buying the company. After six months of negotiations the deal was completed in July 2018, supported by funding from HSBC.
Since the buyout, the business has been undergoing what Cranwell terms as a 'cooling off period'. The management team is working to formalise a new strategy built around organic expansion.
But adapting to a post-PE world hasn’t been straightforward. Under the private equity investors, the three had been joint managing directors, each responsible for their own area of the business, working under the umbrella of the then chief executive.
After the buyout, MotorClean initially decided to carry on with a flat management structure, but it quickly became apparent that this wasn't working. No one was reporting into each other and there was no leadership. Cranwell has since taken the position of CEO.
Looking back, Warren’s view is reflective rather than resentful. After all, private equity can bring a lot of benefits for any business looking to grow. 'I would never say don't use private equity- but make sure it's in and out,' says Warren. ‘It's important to make sure that from the start to the end point that everything is focused around having a really clear path to the exit and that when you sign up you actually believe that the exit is an achievable goal.’
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