Review of the year 2018
Not another review of 2018 – I’ve had my fill of Brexit, The Mexican Wall and doom & gloom, I hear you say. Well, fortunately none of these issues have impacted us much at Nevis and so I promise something a little different.
At Nevis, we’re focused on buying and owning SME businesses and what we have seen in 2018 is that our primary source of new acquisitions is the retirement of owner managers. Last year, we saw more than 50 such opportunities and this is a trend we expect to continue as the Babyboomer generation reaches for a retirement that has been delayed by the financial crisis and postponed by longer life expectancy and better health.
Given that we expect a number of our future deals to come from this source, I thought that I might use this year’s review to cover a few of the topics that were most commonly raised when we engaged with business owners thinking about an exit in 2018.
Topic 1: Growth and Change
We are often asked by business owners how we will change or grow their business after we acquire it. Having frequently built their business over many years, most are concerned we will either instigate immediate or wholesale change or push too hard in search of fast growth.
Our attitude has been influenced heavily by James and John’s own experience when they sold their first business, LCH Generators. The acquiror literally climbed the fences of the LCH premises to change the branding the weekend of the deal. That was indicative of an approach that sought rapid change aimed at achieving fast growth. Whilst the theory may have sounded good in the boardroom, the changes were undertaken at a pace that didn’t allow the new management to understand what had made LCH successful in the first place.
This resulted in wholesale changes that disappointed customers, disillusioned staff and ruined a culture. A decline in financial performance followed and a huge amount of the goodwill that had been paid for was destroyed.
Having witnessed this first hand, our approach is very different.
Firstly, we are acutely aware that growth for growth’s sake is not the answer. As a long-term owner of the business, we want sustainable, profitable growth – not a quick flash in the pan.
Our most recent acquisition is Merkland Tank, a 3rd generation family business which we bought in late 2017. We spent a lot of 2018 learning more about the business, about what works and why it works. Having done this, we believe the business has real potential for industry consolidation; however, for now, we are encouraging the management team to continue to make continuous, small tweaks and improvements that will develop the business and deliver sustainable organic growth: adding selectively to the team, working towards new accreditations and investing in new equipment and infrastructure. With a solid operational base, the next task is to develop and improve our outbound sales and marketing.
In his book, No Shortcuts To The Top, Ed Viesturs describes the mental technique he used in scaling the world’s highest mountains:
“If you look up at the summit and say to yourself, “I’ve got four thousand vertical feet to go over the next twelve hours,” that’s psychologically overwhelming. You probably won’t make it. What I do is break it down into the smallest possible units. That rock forty feet away becomes my first target. I tell myself I won’t stop til I get to that rock. Once I’m there, I pick another nearby goal… it’s only by nibbling away at these immense distances that you can achieve the whole.”
This embodies what we think about growing and developing businesses. If we try to achieve too much, too quickly, the whole team can feel overwhelmed and we’re much more likely to make mistakes, cause unforeseen problems or run out of steam altogether. Our view is – small steps forward, adjust direction as you go and you’ll be amazed where you can end up.
Topic 2: The Long Term
As a buyer of businesses, we are often confused with private equity and as a result many business owners are concerned that we will buy the business and then look to sell it again shortly thereafter. We’re not private equity – we are four guys looking to invest our own money for the long-term into businesses we admire and with people whom we trust.
The best example I can think to illustrate this is Dieselec Thistle Generators. We acquired a near 50% stake just over 8 years ago and thanks largely to the drive and quality of Managing Director, Paul Moore, and his team we have seen profits rise 4-fold. We often meet advisors and other investors who ask whether we are looking to sell given the likely profit it would generate for Nevis.
For us, a sale isn’t on the agenda because we still believe that Dieselec can achieve a lot more and we hope that 2018 will prove to be a transformational year. Looking at our future strategy, we identified two important shifts in the market – firstly, with increased electricity costs, the opportunity for all large energy users to save money by using a Combined Heat & Power Generator (“CHP”) to produce their own; and secondly, the emergence of a gas-powered standby product that genuinely competes with diesel.
During 2018, we spent time with Paul in Italy and Germany securing distribution agreements with world class CHP and gas generator manufacturers. We think both products have the potential to match our current diesel sales and to form the base for the next phase in Dieselec’s development. Having started the year as a supplier of standby or back-up power exclusively using diesel generators, we finished offering a wide range of gas and diesel power solutions. If you have a business with a large power requirement (e.g. food and drink manufacturers, factories, hotels) then get in touch with Paul and his team – average payback periods for a CHP are around 2 years and the long-term profit boost is substantial.
Topic 3: What are we looking for?
In last year’s review I outlined two objectives for 2018: continued growth in the businesses we own and adding new businesses to the portfolio. Whilst 2018 has been a good year for our businesses, we have to report that we failed to add any new companies to our stable. It wasn’t for the want of trying but we just didn’t find the right opportunity for Nevis.
We enjoyed the chance to meet and learn about lots of new businesses and about some new industries. We looked closely at acquiring companies in both the Financial Services and Software sectors – industries that we aren’t ordinarily associated with. In both cases, we found interesting companies built by good people but in the end the opportunities weren’t right for us. The time we spent with these businesses has, however, encouraged us to consider opportunities in any industry where we can find solid businesses and people whom we trust. With that in mind, going into 2019 we have opportunities both in our traditional heartland of engineering, manufacturing and industrial services and in wider areas such as medical devices. Whatever the sector, if you have a business consistently making annual operating profits of between £500,000 and £1,500,000 then we’d love to hear from you!
There are lots of businesses that meet this profit threshold and so we are often asked what else makes a company a good fit for Nevis. To that end, I thought I would spend some time highlighting some of the characteristics we look for and why we like to see them.
We often simplify what we are looking for down to the “3 Ms” – Management, Market and Money. Whilst there are clearly lots of things to consider when assessing a business, we find that most will feed back into one of these headings.
The most important aspect for us in any deal is the team we are going to work with. Our experience tells us that it is teams rather than individuals who are successful and so we look for a business where there will be some continuity of management once the owner has stepped back.
We understand that lots of Owner Managers haven’t got complete management teams working for them who are instantly able to step into their shoes and take the business on. We are happy to augment and add to the team if we need to but most importantly, we need the remaining team to want to work with us and to be committed to developing themselves and the business.
Over the past year, we have seen the value of a strong team working together in the development of Astec Precision. Craig Hyslop joined the business as Managing Director in late 2017 and he and his team have rallied to deliver huge improvements across the business – infrastructure, capability, capacity, customer engagement. These are difficult changes to make and ones which we are confident will help deliver long term success.
We were delighted that Craig chose to buy shares in Astec during 2018 as we are great believers in the power of alignment – that those leading our businesses should have an equity ownership so that they reap the rewards of their own hard work. It’s a great way of motivating people to make good long-term decisions and a way in which we seek to protect our own interests by ensuring their success and failure is linked to our own:
“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.” Thomas Sowell (via Edelweiss)
If you are going to give others huge power over the success of your company, it seems sensible to make sure they have the same definition of success and that they share some of the downside risk.
When we consider the market that a business operates in, the below quote encapsulates our thinking nicely:
“Picking your field is arguably more important to your success than your current skill and future capacity. In some segments of business, everyone makes lots of money and the very best do outrageously well. In other areas, even the very best often declare bankruptcy.” Brent Beshore
There are some markets where the balance between risk and reward just seems to be miles out of kilter. To us, the general contracting and construction world often feels like this. High profile failures like Carillion have highlighted the difficulties of managing hugely complicated works for low single digit gross margins (we aim to make double digit net margins). With so much competition and customers who don’t perceive (or aren’t prepared to pay for) a better quality of service, it is a very difficult market to be successful in.
Of all our businesses, James Ramsay probably faces the toughest market conditions. They are a heating and pipework contractor and for some of their work are subject to the foibles of the construction market. Fortunately for us, we have a super team led by the Shepherd family and we’re working hard with them to focus the business on its specialist skills and working for end users who value the responsiveness and quality of service that Ramsay can provide.
We love to look for businesses that have survived the test of time to deliver consistent results. Whilst every business must continue to evolve and develop, we don’t look for businesses that are growing quickly, unlike many other investors. We are more interested in a business that has been consistent for a long period of time – a business which has continued to meet customer needs for many years gives some comfort that this can be maintained after a change of ownership.
Does avoiding businesses that are growing quickly mean that we might miss out on some fantastic returns? Quite possibly. But fast growth necessitates fast change and that brings big risk (see topic 1!). Our number one rule is not to lose our money – so if that means missing out on the occasional exceptional return in order to earn consistently good returns for long periods of time then that’s ok with us.
“The optimist… understands the math of compounding means the biggest wins don’t necessarily go to those with the highest returns; they go to those who earn pretty good returns maintained for the longest period of time… He sees no need to be the best at what he does. He just wants to never be forced to quit what he does.” Morgan Hounsel
Topic 4: What can you expect from Nevis in a deal and as an owner?
In summary, we’ll do what we say we will, when we say we will, and we’ll treat the business owner as we would expect to be treated ourselves. That’s the minimum a business owner should expect but in our experience that certainly isn’t always the case with other acquirors.
At Nevis, we only invest our own money which means we can be flexible and come up with a deal that works for the specific circumstances of each individual owner. We’ll spend time upfront understanding the business ourselves (rather than paying advisors to do it late in the deal) and we take a pragmatic approach to risk because we’ve run businesses ourselves and we know that there are always wrinkles.
We’ll only acquire companies we admire and want to own for the long term – no buying, pumping up and looking for a quick sale. We want to own the business indefinitely. We’ll pay a fair price and as experienced business owners ourselves we’ll work to protect your legacy, brand and employees by investing in the business and its people.
If that sounds like something that might appeal to you then please drop us a line. We’ll be delighted to hear from you and promise a quick response (and absolutely no mention of Brexit)…