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Ahead of the third edition of finnCap's Ambition Nation: Female Leaders Series event, entitled 'On Track', to be held in London on 24 April 2019, this finnCap podcast hears from finnCap Group CEO Sam Smith about the milestones in finnCap's own growth journey. Encompassing management buyouts, M&As and IPOs, Sam describes how she personally stayed on track along this journey, knowing when the time was right to make those key decisions for funding and expansion.
Podcast transcript in full
What prompted the corporate buyout and what gave you confidence that this was the right move?
I'm not sure I was ever confident that it was the right move!
I think it started with the thought that we had been there seven years, growing a division. What we’d done is always reinvested profits of our division into new staff, generally one at a time, so it never made a big dent in the profits and you could keep moving forward. That was great for seven years until we got to the point where that critical juncture was met. If we wanted to become bigger, we needed to become a Nomad – a nominated adviser – and that meant applying to the stock exchange for permission to become a Nomad.
To do that needed a whole legal process; it needed four qualified executives, which are four senior people that have done nominated advisor transactions in the past. They are all quite expensive and they would all have to take a risk to join us, so it ended up being probably an 18-month process. It was four senior people and we costed it at a £0.5 million minimum.
We said to ourselves, “We can't take that out of our own pool, that’s a bit much”; the real issue that prompted the buyout is that we couldn’t do it ourselves. And if that's the case, then how do we go about funding it?
The best way to fund it was if we created a new entity. With that, we could get some equity that would persuade people that were senior to join something new. We could create this exciting buzz by saying, “Why don't you switch from here to here?”
We also could fund it in new ways, with shareholders putting some of their own money in. So that's how it all came about; it took – from the first seed of the thought – three years to negotiate to get to the actual end goal, which was a 50/50 ownership split between JM Finn and finnCap.
And was that very much a collective decision between a lot of people?
No, actually it wasn't. We only had 25 people in the team by the end of the three years. At the beginning when we first thought about it we probably had only eight people. That meant that we were recruiting for that three-year period on the promise that we were going to do a buyout, with no certainty that we would. In my opinion, everybody deserved that equity as they all took a bit of a risk and we ended up recruiting the right people.
But at the beginning, it was basically me, one other person, and the head of another division we were trying to incorporate that were negotiating with JM Finn.
On the big day, how did you feel that morning?
Well, I’d spent the last seven months of my life doing it and I was pretty much doing it by myself. What I thought was the process at the beginning, which was to set up a division that was a subsidiary, didn’t seem too difficult. And actually, by the end of the seven months, if we could have set up a new company from scratch, it probably would've not been very different.
There was a big old process of setting up a subsidiary – a totally different entity – and everything had to be in place. We had to have our own systems, our own brand, our own website, our own contracts; it was a huge project.
On the day that it happened, it was more just relief that it did all happen. The trading systems worked, all our clients had signed up to the new entity, and we'd had seamless trading; because we trade for a lot of institutional clients in small-cap equities, they traded the day before and had to settle into the new entity which poses a big risk for the firm.
All the technology worked, and I'm not a big technology person, so that was a huge thing! But on that first day, waking up and knowing it was done, that everything was settled, knowing our clients were happy, that nothing had gone wrong and then we had a big party that evening, I just think it was a huge relief.
What was amazing was that we went from a division where no one owned shares, to the day after being a company – the subsidiary of a company that was owned 50% by staff and our parent company owning the other 50% at that time.
The difference was just walking into that room. I actually thought that these were two divisions that didn't really talk to each other and didn't really gel. I thought my two-year plan was to integrate the two teams to get them working together. And there were a lot of issues, like they traded bigger companies, whereas we acted for smaller corporates, but I said we we’d make this work.
But they had a cheque-signing ceremony the night before in a big room, then we all came in the next day and it was like an instant change. People were getting on; all shareholders had a combined vision – they were totally different. So my two-year project of how to get everyone to gel together was already done. It was done because we were all owners of the business and we signed a cheque. That was absolutely huge. We were suddenly 28 people, all in this together. We had a vision and it was our baby – it felt like a very big family.
Now, finnCap has formed over the last 10 years, which is a relatively short amount of time. How did you personally know over the last decade that the growth trajectory of finnCap was the right one?
We broke it down into quite small stages. What I've always done is look out over the next two to three years. We always have a five-year plan, but I can't ever really see five years ahead. So we look at two to three – what's achievable? What can we do?
Once we see that, we drive very hard to get there. I'm very task-focused and very action-focused in getting people to believe in the vision. Then we just go hell-for-leather to get there. Once we are there, then generally we find that we’ve either hit our five-year plan quickly, or we haven't and we move in a different direction. Then it’s the next three years that we envisage and we come up with the next thing.
I don't see longer ahead than that. I don't think it's possible, particularly in such a changing environment, but as long as I’ve got where I'm going in the next two to three years I'm happy with that.
Tell us about the secondary buyout?
What happened was that three years after the buyout we had 50% of the equity. Not all of it was allocated on day one, so we had some options that we gave to new staff. Then after two or three years we hit our first really exciting milestone – we were number one on AIM – we needed to start growing.
With the size of companies we act for, we needed to start adding more services and get best quality people in, who are used to acting for those sizes of clients. So how were we going to attract them?
The challenge was that we needed more equity for more staff. To do that, given that we had run out, we could do two things: we could keep issuing options, which would have diluted everybody else, including the founders and the core people that were still there, or we could say to our 50% shareholder, our parent company, which wasn't really doing anything other than being there in name – it wasn't really bringing in any new business or supporting in any other way – and trying to get them to sell some of their stake.
That's what started the challenge; well, actually, the first challenge was that they said no – they didn't want to sell. We were growing fast and it was quite an interesting business for them; the answer was “no”.
This was a very different challenge because it wasn't a doable deal. It was more about trying to work out how to persuade someone to do something that they don't want to do. That was a very different, tactical way to do things for me. I used my Chairman a huge amount and I used a lawyer a huge amount, to strategise on how we were going to do this. It was a very tactical thing, to get to a result when someone doesn't want to do it.
This situation wasn't the same as the buyout, which everyone wanted to do, nor was it the same as the IPO process. It was a challenge.
But we were up for it; it took another 18 months to achieve and that was all about sticking with what we wanted and not giving up. You have to keep focussed on why you want to do it. I had to keep persuading; it almost became a battle of wills that we got there in the end. It took a lot of emotional energy and out of everything on finnCap’s journey thus far, this was the most stressful for me personally because I was on my own doing it. It was just me, going into battle with the management of our parent company. I couldn't really use anyone else; it wouldn't have worked.
But, on the day, I walked in and they said “OK, let's do it.” Then I had 48 hours to get the money in!
Of course, that was a slight stress, in the sense that I got the agreement now I needed to get the money, which was a whole other thing. But it was a battle of wills – who was going to give up first?
My advice on that is do not give in on what you want to achieve – you will get there. It is hard; you will need coaching and a lot of tactical advice. For me, the lawyers were absolutely phenomenal in trying to create a commercial case for how we would get around the pitfalls and think about strategy.
finnCap recently acquired Cavendish Corporate Finance and IPO'd. The two things happened simultaneously, so what prompted that move? Was there always a vision to do an M&A and float at the same time?
No, and this is an interesting one. It was probably when we had been there for nine years, post-buyout. The first two to three years was spent dominating the micro-cap market. The second three to four years, we needed to get into the small- to mid-caps and bigger companies, doing more services. We added market-making and investment companies; we were always adding different things.
We had got to the point where we were the number one broker on AIM and the largest adviser on the stock market by a number of companies. We really were driving the business in a very competitive market, building market share at a time when the number of companies on AIM was actually decreasing.
As we’d got to number one, then it became a question of “Where do we take the business from here?”
We had a 5% market share. We could get a 10% market share, but that was quite a dominant position at that point in time. And if we are trying to move from 5% market share to 10%, was that exciting enough? Was that a big enough leap? And was that enough profit to make everything worthwhile, to get everyone really motivated to achieve it?
Actually, most of us thought our ambition was bigger – much bigger than gaining 10% market share. And when you get to 10% that's pretty much it; getting more than 10% is very unlikely.
That's when we thought “Right we need to do something new.”
That was probably eight years into the journey. We needed to do something else and to get into a different market. We still wanted to achieve the 10% share, but there were other things we wanted to do which were bigger markets and they are growing. And from a personal point of view, I probably needed to take the business that one step ahead. I needed to have a bigger ambition for myself and moreover I needed to make it exciting for me as a CEO, in order to sell my vision.
I was starting to get to the point where I was thinking, “If I have to sell to the team that we are going through 5% market share to 10%, well that doesn't excite me personally.” So that was becoming more difficult and that was my personal driver as well as the fact the business really did need to start moving into other areas.
A year into that thinking, we looked at lots of things and got into new areas organically – we got into raising money for unquoted companies, we got into M&A advisory, some bid advisory work which we'd never done before; we did a bit of organic work and it takes time to do that.
Then we started to think. It was from a chat with my Chairman, where we both at the same time were thinking, “Look, it's been 10 years now; this is the time to take some risk.” We'd got to critical mass and everything felt a bit secure. I hadn't worried about the cash balance for five or six years and thinking this was the point this was the crunch moment. We both thought this at exactly the same time, and as the big shareholder his view was very important.
The only way we could grow now is to take a risk – were we all up for it? It was a totally different thing to anything we’d ever done before, like organic growth in teams. That’s not to say that that isn't risky, but this was a whole different level.
Quite quickly, when I knew that I had to do that, I got very excited about it. I was still nervous about the risk, but I knew that that was where we were going to get to that £100 million turnover target, rather than just doubling our market share.
And in a way, did this feel like you were somewhat harking back to how you felt at the original corporate buyout stage?
Yes, and that's why two to three years out you need to be able to see something bigger than just doubling. Every few years we have doubled, but we see how we can go further than that. If my vision at any stage was simply to double and see how we go, that wouldn't have been enough for me or for the team to get really motivated. We needed something to aim for.
Was the idea of going public exciting?
It wasn't originally!
I think the idea of the acquisition was really exciting. When the acquisition came with the requirement that we had to have a liquidity event, because the acquisition didn't want shares in a private company – understandably, if they were going to lose control – we talked about the liquidity being AIM, so then at least they would have liquid shares. It all came as part and parcel of the deal and we really want to do the deal.
But it was such an obvious fit. We've known Cavendish for a long time; they had a great brand and it was exactly where we needed to be, strategically. Plus, if it didn't tick every single box, we would never have risked doing an IPO at the same time.
But because it was exactly the right asset for us to buy, we all knew it felt absolutely right from the first conversation, after which it was just terms that took a while to negotiate. The IPO was just part of it.
It took me probably a week to get my head round to thinking that I really wanted to do this. I've IPO'd over 100 companies personally, as an adviser. Now I'm here thinking, "Oh my, I have to do this myself – do I really want to be in the spotlight, reporting numbers?"
It was all those things our poor clients have to go through. It gives you real empathy.
It's those kinds of feelings where you can understand why someone does something and when you do it yourself you realise just how stressful it is.
It's a big jump – that feeling when you’re just about to jump out of the plane to do that skydive. You're on the precipice. You ask yourself if you really want to do this. Because once you do, that's it, you can't go back.
Over a glass of red wine, I asked myself, "Am I doing this?" Almost within two minutes I knew that I was. Everything felt right.
And AIM felt right as a target market?
Yes, and we also thought, "If we are doing this deal, we do the need to grow." This was the first stage in the journey – our first acquisition – this wasn't the end.
What AIM does is push us to think, "OK, we need a growth story now." It’s so that when we get past that, we can buy other things; we become a platform, something bigger. Actually, having an IPO in the mix forced this discussion amongst everybody and made us even more excited.
We thought that we could now own the growth space. That would mean advising all private and public companies under £500 million, adding value to all of their exit options and to all of their funding options. We could become the home of the entrepreneur and that started to feel really, really exciting. Everyone bought into that.
I expect everybody had much the same reaction initially – that kind of "Oh, what are we doing?" feeling. But very quickly it began to make sense and got quite exciting.
It does take a while and you do have to sit with it. Ask yourself – does it feel right? It's definitely nerve-wracking, but once it feels right it's very easy to push on. At that point we were absolutely going to do it and if we hadn't had done it and it had failed, then I would have been really disappointed. I went from thinking it was a very scary idea to being absolutely committed to it in about two weeks.
And what does the next two or three years look like?
Now it's about integrating the acquisition. There is a lot of revenue synergy – this was not a cost synergy deal – it was about synergising revenues by getting into new services, promoting the brand in our space as well as outside the finance sector, to really get known to all of those scale-up companies that might want services. This was as well as thinking about, in the next two or three years, what else might we want to buy. What areas could we be in and how do we own the growth space? What does that mean? How do we tell clients that we doing that? What other services might they like from this one-stop-shop? We are really getting into private equity firms, which have never been core clients of the firm in the past, working out what they need and what services we can add on.
That's the £100 million pound vision; it's aspirational and we can probably set it for the next five to ten years. For the next two to three years, it’s about how far can we crack on to that journey, what can we add and how do we get the right people in, keeping everyone motivated on our vision?
Our next Ambition Nation: Female Leaders Series event is called ‘On track’ and you've personally described to us how you have stayed on track over the course of the life of finnCap. At each juncture on that journey, from your perspective as a female CEO, what was that key bit of advice or knowledge that helped you make those big decisions?
My best piece of advice is that you need to find the clarity of thought, because it is your thought. You need space to do that and you do need to trust your own gut on it.
The other thing was that I talked to a number of different people, as wide a mix as possible, to ask what could be possible. What did they do in a similar situation and when did they feel that it was right?
The more I talked about it, the more it validated my own view of whether this was right.
When you are a CEO and running your business, everyone knows that part when, for whatever reason, it just feels right. Everything else can be sorted out around the edges, but for me it was that validation. If anything felt wrong, I would absolutely listen to that, because it probably means that it is wrong. I used coaches to do that. I also talked to my board.
And I talked to my friends about how I would deal with it, personally. In terms of my life, was it something that I could do? At the time, my daughter was starting school – she was four – she was starting in September and the IPO and acquisition were going to hit at the same time.
I thought, "Do I really want to do this, this year?" Integrating her into school for me was a big challenge and I wanted to do it properly. So that all was taken into consideration of just getting myself in the zone thinking, "These are all the challenges, now how do I manage them? How do I make sure I get enough support to get her into school, do the acquisition and do the IPO at the same time?”
I'd say that was the biggest thing – knowing when it's right, but also giving myself the space to talk to as many people as possible.
I’d say if anything doesn't feel right, don't do it. It's probably not the right time.