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Evolution Capital: Accelerating value

M&A activity in the technology, media and telecommunications (TMT) space has prospered throughout the pandemic, and investor appetite is high. Here, Nigel Cook, Founder and Managing Director of Evolution Capital, a mid-market corporate finance boutique specialising in the TMT sector, talks about the current climate and e-Accelerator – the UK’s first ICT mergers and acquisitions marketplace portal 

“When the pandemic struck back in March last year, things went very quiet, and for three or four months there was very little activity, but by the autumn, most of the tech- based private equity (PE) firms were back in the market and looking for acquisitions. By the time we got to Christmas, there was a lot of competition for the best businesses, and since the New Year we have seen investors and PE firms moving funds from other areas in which they have invested into our space, because it is seen as a safe haven and a good place to make money,” Cook explained. 

The pandemic has also caused business owners to reassess their options. “When you have an event like the pandemic, it does bring forward decisions for entrepreneurs who are looking to retire, but it also creates opportunities for others who are looking to grow because, whilst there have been limitations on organic growth because of restrictions on business activities, there has been another way forward, which is through growing your business and enhancing its value through M&A. More and more entrepreneurs are seeing that as a route forward,” he added. 

New ways to conduct business 

Like many of the companies it advises, Evolution Capital has had to change the way it conducts business over the last 18 months, replacing face to face meetings and processes honed over the last 20 years with video communications and remote collaboration.

“Corporate finance is a traditional field and we’ve all built processes that are based around face to face interaction. For the last 18 months we have had to do much of our work remotely and that creates challenges when you have to share information across multiple businesses and dozens of people and need to create that human element, which is still such an important factor when deciding whether or not to invest in or buy a business,” Cook said. 

Matchmaking, information-sharing and benchmarking

Sharing information

Evolution Capital has built a new software platform, e-Accelerator, which provides a framework for matchmaking, information-sharing and benchmarking, where business owners can interact remotely with the Evolution Capital team and potential buyers/investors can understand more about businesses and their management teams. 

As its name suggests, e-Accelerator is a new tool designed to automate and speed up the sharing of confidential information in a world that increasingly relies on remote, rather than face to face, interactions. 

The cloud platform enables business owners to interact remotely and securely with a network of potential buyers and the Evolution Capital team who can help them develop transaction-ready deal propositions. 

Investors and business buyers can use e-Accelerator’s company finder to search for, filter and find companies that might be of interest to them and to show their interest in finding out more about individual companies by clicking a button to alert the Evolution Capital team. 

The platform, which requires users to sign NDA agreements at different levels, provides three services to authorised users, who are given different levels of access depending on their status. 

  • Matchmaking. Business owners can connect to Evolution Capital’s accredited and qualified contacts, giving them quicker access to a greater number of potential buyers or investors. 
  • Process management. e-Accelerator supports the transaction process from the initial business engagement stage through to deal completion, resulting in faster decision-making, greater transparency and more control over the process for all parties.
  • Benchmarking. Buyers and investors will be able to identify high performing businesses at a glance thanks to a benchmarking score showing whether a business is in the top, middle or bottom tier of their sector. 

M&A activity running hot 

The launch of e-Accelerator comes at a good time for Evolution Capital, as M&A activity in the TMT sector is running very hot. The company is well placed to profit from this activity as its rationale is to ‘build value’ and, as such, its services are in demand both from business owners and from a handful of buyers looking for investment opportunities, often as part of a ‘buy and build’ strategy. 

That the company specialises in the TMT sector is another benefit, as changes businesses have made over the last 20 years have helped to make this a highly attractive sector for investors. 

“PE clients and other investors clearly like the business model. The TMT space has changed dramatically over the last 20 years. Twenty years ago perhaps 30-40 per cent of revenue would have been recurring revenue, because then a business, regardless of whether it was in telecoms, IT hardware or software, would be about selling systems that were hung on the wall, wiring the office and maintaining that network. Today, services are cloud-based and revenues are generated through connectivity to the cloud or the software you are accessing or the storage you are using. It is quite typical for fast growing, high value IT businesses to have a recurring revenue
of 80-90%.” 

This, Cook points out, is where the value in a business resides. “In the last 18 months, very few businesses have performed as they did in the couple of years running up to the pandemic. Some have performed much better – those that were providing remote services – while others that were providing hardware and project installations have struggled to fulfil orders. 

“What’s interesting in our space is that where businesses haven’t performed as well as before, it is largely because one-off projects or hardware/software sales have been held up, and that’s generally the smallest part of the value in a business. It’s the customer contracts, the recurring revenues that create the value and that pretty much continued throughout the pandemic,” he added. 

Building value 

In its focus on building value for clients, Evolution Capital is much more than just a broker between buyers and sellers of businesses. It is also an advisory firm that can guide clients through the process of building value whether they are looking for a sale in the next six months or not expecting to realise value for many years to come. The important thing, according to Cook, is to be prepared for any eventuality.

Match-fit for sale at any point

“Business owners need to be ‘match fit’ for a sale at any point. A lot of firms that are growing through acquisition are approaching owners and asking for information and if you haven’t prepared your data, it is difficult to put your best foot forward. First impressions are obviously last impressions, and I do believe that owners need to have a good understanding of where the value is in their business and need to be able to respond to a buyer in a structured way.” 

An Evolution Capital business review should also provide clarity for business owners who might not have considered the different routes open to them. 

“In most approaches, an owner has some idea of their expectations from a sale, but they may not have considered all their objectives and the routes to achieving them. A business review will really define those objectives, which might be different for a family business with one founder/majority owner than for one with half a dozen owners, all of different ages, who might all have different expectations of what they want to achieve from a sale. Some may want to stay with the business, others might want to part-exit and retire.” 

Cook adds that failure to do the necessary groundwork in the preparation phase is another mistake commonly made by business owners. 

“There has to be a platform of data that carries you all the way through the process. A common mistake is to come up with a short form and to agree a price with the buyer and then, once you have signed a head of terms and the investigation starts to take place, being unable to support some of the statements you’ve made or the performance that you’ve outlined. That leads to an erosion of the price that was agreed. The biggest mistake is not preparing for due diligence and the breadth and depth of the investigation that takes place, particularly now that the PE firms are very specifically looking for sustainability in a business.” 

With 84 successfully completed deals, with a combined deal value of £602 million, Evolution Capital already has an enviable track record in the TMT space. The launch of e-Accelerator is an exciting new addition to its offering that will bring new efficiencies and opportunities for its 200 plus clients, as they look to enhance their business value. 

For Cook, the future is clear. “We will continue to offer premium services to the mid-market. We have new methodologies and processes, which we have developed over the last 12 months, and we will use technology to supplement face to face activity, which has been fundamental to our process for the last 20 years, with interaction through the cloud and through e-Accelerator.”