Case study: When your growth business model stalls to a halt
As attractive as they may be, business models relying on continuous growth also harbor major traps. One of these lies in the low awareness of management and shareholders that growth slowdowns should be anticipated and somehow financed.
Such situations are of course often encountered in the software edition business, and we would like to share a recent case CDI Global France experienced with a client, the lessons learned and some advice to business owners.
A company on the verge of failure
Our case company -which asked to remain unnamed- was a software editor created 13 years ago and operating in the field of smart office solutions; after achieving self-financed commendable success and developing a solid customer base with many French blue chips, they opted to pursue growth through international development with an indirect model (added-value resellers
At the same time, they decided to support an enhanced and accelerated product roadmap through a significant increase of their product group headcount
Their uninterrupted fully self-financed organic growth history was however brutally disrupted by the Covid crisis that substantially decreased their cash generation; they unsuccessfully attempted to raise funds, while keeping incrementing expenses to secure R&D output and human resources. For lack of support from their banks, company ran out of cash.
They turned to CDI Global for help and we were glad to offer our support. We put together a team of three partners of CDI Global Paris office: a software business specialist, a turnaround manager and an M&A specialist, each with more than 30-year experience in their field. After a quick assessment of the current situation of the business, especially its very immediate tough constraints vs its still strong potential for development, the team could quickly propose a comprehensive stepped approach
What CDI Global did, in 5 steps
- 1st step - searching worldwide (through our international local CDI Global offices) for potential in bonis buyers in France, Europe and North-America for the company, which could easily be identified as a gem in need of cash. Interests confirmed through 2 non-binding Letter Of Intents (LOI) from a North-American and a French companies signed within a couple weeks. Both however renounced due to the deteriorated financials and the clear need to implement a restructuring plan to bring the company back to cash neutral operation.
- 2nd step – establishing an in-depth diagnosis of the difficulties encountered by the company. Overinvestment in resources (both human and financial) at the wrong time and inadequate operational management in a long-standing crisis situation.
- 3rd step - bringing company management to decide and restructure the company, with our strategic and operational support: -30% payroll expenses within a few weeks, management model change and cash management set as an overarching priority.
- 4th step - resuming contacts with potential buyers after 3 months of restructuration starting to show its positive impact, thanks a more attractive outlook. 2 LOI signed with two French acquirers, exclusive negotiations entered with one of them. Better perspective, yet the company went into cessation of payments due to unrecovered receivables from the French State.
- 5th step – supporting the company in their switch to a “pre-packaged”, Commercial Court ruled, transaction mode, with full sell-side assistance to optimize transaction conditions with 8 candidate acquirors participating in the process. Most of the assets of the Company and almost all its employees were finally taken over by the one company chosen by the Court over the 7 other candidates.
Our approach and specific contribution
- A client-company-centric approach: prioritize the interests of the company and protect its future, open several options given the lack of visibility and the complexity of the situation:
- Seek both industrial and financial investors, rather than recommending an immediate collective procedure (which could have been justified because of the cash-strapped situation at the start of our assignment)
- Propose and initiate a restructuration plan right after the failure of the initial search for investors, rather than immediately triggering a collective procedure.
- Contribute to bringing a pre-packaged transaction to fruition rather than triggering a simple bankruptcy filing and hoping for the best recovery procedure that would have resulted in an auction for individual assets and the layoff of most of the employees.
- Mobilization of CDI Global’s capacity to identify and contact numerous potential buyers on three continents within a couple weeks: 75 potential buyers identified, 45 contacted, 22 out of 7 countries expressing an early interest.
- Building a trust-based relationship with client company shareholders and managers, the ensuing intimacy enabling us to quickly develop a deep understanding of company operation intricacies and give tough-to-hear advice.
- Leveraging our expertise palette in the software sector, company management and finance to support the company in the design and management of a relevant restructuring plan.
- End-to-end supporting the preparation and implementation of a pre-packaged transaction.
Lessons learned and useful reminders
The seller's advisor must constantly ensure that the former permanently keeps in mind several fundamentals:
- Anticipate: finding a strategic or financial buyer is a months-long process that should not be carried out under the threat of cash exhaustion. A running, conservative 12-month cash flow forecast is a basic instrument to perceive the first warning signals and trigger action.
- It is the buyers who best identify the elements of value of the company (and they can be different from buyer to buyer), not the seller.
- “Time is the essence” in a transaction process when cash flow is tight and being straightforward with potential buyers for both positive AND negative information avoids losing precious time. No matter how well-dressed and made-up the bride is, the transaction ought to be based on naked truth.
- At the end, the true value of a company is that on the bank check which substantiates its acquisition, not the result of a Discounted Cash Flow model, no matter how sophisticated.
The role of the seller’s advisor is essential for:
- Expand the field of potential buyers, beyond the obvious and beyond borders.
- Adequately communicate and prepare the sale: financial and strategic investors cannot be treated identically but both must be quickly informed of any new development in order to build up their trust in the process and the target.
- Identify the real motivations of potential strategic buyers, which can be very diverse: contribution to turnover, additional product offer, technical expertise, client base extension, etc.
- Foster competition between buyers.
- Listen to the feedback of interested investors who however do not make an offer: they indicate the path to follow to optimize the sal.
- Support the seller at all times in the process, enabling proper decision-making while they are also managing their business on a daily basis.
Cash flow is always the key element in the growth and survival of a company as demonstrated by numerous examples from SMEs to large international concerns and anticipating its evolution is an absolute requirement.
A solid and competitive offer, a large and loyal customer base and an agile and aligned management team opening up numerous development options are however THE key to the future of any company.
CDI Global with its diverse deeply connected international team of industry experts, seasoned ex-senior executive managers and M&A specialists is able to assist their clients all the way as soon as they detect a future need for cash injection, using our skills and experience to advise them.
By: Thierry Gibert and Gerard Payen, CDI Global Partners
