Reputation management: the key to enhanced exit value for PE – and VC – backed businesses
If anyone needed a reminder of the critical importance of reputation management, look no further than the news. The disastrous trashing of the UK’s international good name for stable government and sensible economic management by the short-lived Truss administration – and its painful consequences – provides a textbook case study on reputation mismanagement.
But it’s not just in politics where reputation matters. It’s essential in business too, and never more so than for those new and early stage businesses backed by private equity (PE) which are so vital to rebuilding and growing the UK economy.
Why does reputation matter? A recent survey of 200 of its members by the British Private Equity & Venture Capital Association (BVCA) into investment activity in the UK during 2021 underlined the importance of the sector. While it is not without its critics, it nonetheless plays an important role in supporting ambitious, innovative new businesses and job creation.
The BVCA’s Growing Great British Businesses survey revealed that 1,320 companies received private capital totalling £17.3 billion, with 90% of all investment being to SMEs and two thirds of the total funds going into companies outside London. The survey also calculated that private capital backed businesses employed two million people and generated £208 billion – 5% of the UK’s total GDP last year. The statistics highlight the UK’s position as the second most significant PE and venture capital (VC) hub after the USA.
The survey was carried out before the war in Ukraine erupted which, together with escalating inflation, rising interest rates and geopolitical turmoil, is inevitably impacting business confidence and creating additional challenges for investment decision makers. Those challenges have resulted in a drop in deal numbers compared to the record year of 2021.
According to the Centre for Private Equity and MBO Research at Nottingham University Business School, there were 96 buyouts completed in the first six months of 2022. Their cumulative value was £19.7 billion, the second highest amount for the same period since 2007.
However, with typical three-to-five-year timeframes before exit, the importance of embracing a strategic approach to IP valuation, brand protection and reputation management from the very outset of the investment relationship, rather than towards the end, is key to driving enhanced value.
This is best achieved through an integrated legal and reputation management approach so that IP is correctly identified, valued and protected and that reputation is defined, promoted and defended. Through successive rounds of sale and re-investment, a positive reputation remains constant and provides the platform for continued future growth and returns. Therefore, it makes good business sense to invest a portion of an injection of funds towards defining and sustaining that reputation.
Reputation management’s multiplying effect
For David Brennan, the CEO of longstanding Definition client Nexus Vehicle Rental, defining and promoting reputation has been key in driving the transformation of the business. Today, Nexus stands as an enhanced-value, technology-enabled, market-leading corporate vehicle aggregator with more than 800 major customers. He has successfully steered the business through several rounds of PE investments and has exited each delivering positive returns and championing the value of reputation in creating value.
Nexus received a £9.5 million investment from Livingbridge in 2008. Bowmark then acquired a majority stake in 2015 for £51 million. It exited the investment in a 2018 buyout, selling to Phoenix Equity Partners for £142 million, generating a 3x return for Bowmark.
Brennan is unequivocal in his belief that an early and consistent focus on reputation is essential to driving value: “We have learned how to grow, protect and define a business in a unique way to stand out in the market. There are certain things you have to do within a private equity lifecycle to make sure you deliver the most value. Our view has always been that you look at the end point and ask what does this business need to look like in five years’ time when the private equity company wants to sell? How do you build its reputation, how do you make it unique in the market and that starts on day one, not on year four or five.”
Definition has come together with national law firm Walker Morris, which has extensive experience with PE houses and portfolio companies, to produce a video explaining some of the practical steps around IP, brand and reputation management that can be taken to secure maximum commercial value. Here’s our video on maximising brand, reputation and intellectual property to enhance exit value.
For further information or to arrange an individual presentation on reputation management to enhance exit value, contact us today.