Articles
Interview with Declan Kavanagh, MD of Insight Test Services
ICON66, March 2009
Declan Kavanagh, Managing Director of Insight Test Services talks to ICON’s Head of M&A, Brian Parker, about the sale of his business to Sogeti.
Insight, based in Dublin is a market leader in software testing services, primarily for major clients in the financial services, utility, ICT and public sectors. Founded in March 2003, the company grew rapidly to become the leading software testing provider in both Ireland and the UK.
Declan you sold your business in 2008, are you still involved?
Yes, very much so as our deal structure involved an initial payment and then a one year earn out, with a further year retention, so it is all hands on deck at the moment as we push to maximise our earn out. Insight’s a young, high growth, people business and so we always expected that a deal would involve some sort of earn out/retention and we were prepared for it so all the shareholders have remained with the business after the sale. We also spent quite a lot of time in the legal negotiations getting the protections we needed to give us the right to control and manage the operations during the earn out period.
Looking back to the period running up to the sales process, did you plan it or did it just happen?
When we started the company in Dublin in 2003 the shareholders had a clear vision that we would like to sell in 5 years. From the very beginning we had that in mind and so decided to do things right and use Best Practice in all aspects of the business from financial controls, staff and client contracts, service delivery processes and policies.
Our focus wasn’t on selling the company, it was very much on building a good business as we knew someone would want to buy us if we did this well. Importantly, we also appointed a Non Exec Chairman who had experience in our sector and added considerable strategic weight behind the business.
So did you get those approaches you were looking for?
Yes we did. The business scaled rapidly both in Ireland and the UK on the back of some significant blue chip client wins. That started to get us noticed by our competitors and it led to a number of approaches last year. Selling the business at this time, fitted in well with our 5 year plan, so the next stage was to appoint experts who could help us maximise our deal value. We ran a pretty rigorous selection process and appointed ICON and O’Donnell Sweeney Eversheds as our respective corporate finance and legal advisers.
Did you get many offers for the business? Yes we had 5 offers from potential acquirers in Europe and US. Ultimately we chose to go with Sogeti as they represented the best offer both financially (with its cash and earn out structure) and strategically, given their global presence.
Their final offer was a lot more attractive than their first and that must primarily be down to the competitive tension ICON created between the potential acquires, which significantly improved our deal terms.
What were the biggest challenges in selling your business?
There is no short answer to that as there are so many issues in selling a company; certainly a lot more than most people could possibly realize. It’s very challenging as there are so many issues with which you are unfamiliar. Maintaining the balance between running the business and keeping the deal on track is nigh on impossible and requires a huge amount of energy. Time is not your friend in the weeks running up to sale, so to avoid cutting too many corners you need to make sure that you have prepared properly. Amongst other things you need a good management team behind you as you have to be devolved from day to day business issues; I’m lucky enough to have a strong management team alongside me, which included 3 of the founder owners. You also need a good corporate finance adviser to drive the process but also, and importantly, one who you can get along with as they will be part of the team for up to 6 months. T
There’s also the other obvious challenges such as needing to get your house in order and the painful process of building a dataroom for due diligence but also the less obvious challenges such as maintaining consensus amongst your shareholders on key issues. Becoming part of a large french listed group with over 18,000 staff also meant that we needed to prepare a proper intergration plan
It was a tough but rewarding experience. Now Brian you will have to excuse me as I have to run – after all I have an earn out to focus on.
Declan’s Top Tips
Ensure your business processes and records are in good shape well before transaction process starts
Appoint professional advisers who have the experience and style that suit you
Tidy up any potential shareholder issues before the transaction.
Be open, honest and straight with prospects
Make it competitive unless there is a crazy high offer on the table
Get a simple, deal structure, well documented in your prospective purchasers “letter of intent” (LOI)
Maximise up front cash, shorten earn out and lock in periods
Do due diligence on your prospective purchasers short list
Don’t take the eye off the day job, selling, delivering, managing
Don’t select your buyer based on value alone, make sure structure, synergies and chemistry are right if you have to continue working in the business during any Earn Out phase
Avoid employee share option plans (ESOPs), use a sale bonus structure paid through payroll to incentive employees
Don’t allow integration or interference if there's an Earn Out
