Incremental's sale to Telefonica Tech: How we made a UK tech giant
Rory McPherson, Corporate finance partner at advisory firm BDO, talks through their role in Incremental's sale to Telefonica Tech and gives advice on how IT companies should approach funding
Earlier this year, digital transformation and analytics company, Incremental Group, was acquired by Telefonica Tech UK&I in a deal that considerably increased Telefonica's size in the UK.
The deal, for up to £175 million, was the culmination of years of preparation and hard work. The team at BDO advised Incremental's shareholders over a five-year journey through the initial MBI, two phases of private equity ownership, three bolt-on acquisitions, and the eventual sale.
For tech businesses, the scale and value of the Incremental deal is very exciting. We know that the sector is alive with entrepreneurialism and that the opportunity for rapid growth and exit is there. Savvy tech business owners can make their millions in a relatively short space of time if they get the basics right.
How the deal materialised
Private equity investment is a goal for many businesses. BDO runs a bi-monthly survey of mid-sized businesses in the UK - called Rethinking the Economy - and a desire to attract investment is a regular theme. When we look at preferred strategies, a sale that enables an exit is also perennially popular as a goal. While the market has undoubtedly been shaken by external factors in the last few years, dealmaking hasn't ceased and there are plenty of funds looking for the right business to invest in.
Incremental secured two rounds of private equity investment before announcing a successful sale to trade earlier this year. The business was only five years old at sale, making this a rapid growth and exit deal. BDO worked with Incremental throughout its lifetime, helping it to build quickly and achieve its goals with a view to sale.
Stuart Kerr, Incremental's CFO, says: "The success of the Incremental journey has been immensely satisfying for everyone involved, because we ultimately achieved exactly what we set out to do. In a five-year period, we built a £10 million EBITDA business, employing more than 350 people from scratch. This had been our objective at the outset and we were able to pursue this against a changing backdrop and in the desired timeframe.
"Resilience and perseverance were the two most significant attributes that got us up and running. Once we were off the start line, it was critical to our success that we built an exceptional and experienced team around us to support the growth and also to ensure we had appropriate succession in place from an early stage. Beyond that, it took a lot of hard work and commitment to deliver what we set out to achieve," he adds.
Private equity backing boosted Incremental's performance pre-sale. "Private equity was a major accelerator for our growth and without it we would not have enjoyed the same level of success," says Stuart. So, too, did growth through acquisition - Incremental made four acquisitions over its five years in order to grow.
Taking a strategic and pragmatic approach helped keep Incremental on plan. Talks with Telefonica went on for some months before the deal was finalised, providing Incremental's founders with a route to exit, securing the business' future and making Telefonica one of the largest Microsoft partners in the UK.
How should other IT companies approach funding?
One of the most important things to remember when approaching funds for investment is that finding the right fit is vital. When the relationship doesn't gel right, the funding partner and the business management team will never be able to get the most out of the experience. This advice echoes no matter what sector the business - taking on private equity funding is a big deal and will require close working with the funder, so it's imperative that personalities mesh well.
Getting prepared for funding is much easier if you work closely with advisers, who will help you ensure your business plan is strong and holds plenty of appeal. In fact, working well with advisers is vital for business success, admits Stuart. "Before we even got to the start line of Incremental, we were very clear in our vision that we wanted advisors to partner with us for the full journey and not just part of it. This meant we had to find advisors that had a shared belief in our vision and our goal and were therefore willing to adopt a longer-term view.
"Having a team alongside from the outset, through all the twists and turns, builds an enormous level of mutual respect and trust. With such a tight relationship, you can have the difficult conversations when needed and, crucially, also share a laugh or two along the way. Without this, we would not have achieved the same level of success that we ultimately delivered."
Neil Logan, CEO of Incremental, agrees: "For business owners with ambitions like ours, it is so important to be able to rely on insight from advisers who understand the dynamics of the M&A market, the nuances of our sector and how to get a deal over the line. It's also vital to build a positive working relationship, which will allow you to succeed together."
As an advisory partner to Incremental throughout its lifetime, the team at BDO built an in-depth and long-term plan to help develop this business to its full potential. Taking advice from an organisation such as BDO helps place business owners in a strong position when seeking funding.
Rory McPherson, is Corporate Finance Partner M&A at BDO