Peter Lidgitt is the Chairman of Mastiff Group, a group comprised of close to thirty independent businesses in the wide-ranging service industry. Since starting the business in 2009, Lidgitt has grown Mastiff to an UK-wide operation with turnover of around £22 million, almost entirely through a buy-and-build acquisition strategy.
Speaking to the Buy & Build podcast earlier this year, Lidgitt offered a range of fascinating insights into the UK service industry, the growth that can be achieved through buying and building, the benefits and challenges of distressed acquisitions, along with a wide range of in-depth knowledge accrued over around 40 years of constant dealmaking.
With a business approach that is forensically focused on cashflow and strict criteria for the types of businesses it targets, Mastiff Group is constantly working on its next acquisition.
The group offers an invaluable example of how a business can achieve rapid growth through acquiring both solvent and insolvent businesses.
Furthermore, with 12 acquisitions completed almost entirely remotely since the start of the COVID-19 (Lidgitt is based in France), Mastiff’s continuing growth over the past two years demonstrates how dealmakers can both adjust to the challenges posed by the pandemic and take advantage of the numerous M&A opportunities it has created.
A teacher by trade, Lidgitt moved into business when he joined a cleaning company in Luton. From this point, he was put in charge of the business’ operations in Sheffield, before moving on when the owner sold the firm. Lidgitt then started his own businesses, making several acquisitions before selling in the late-90s.
While this was around a decade before Mastiff was founded, this is where the group’s story really begins. After selling his own business, Lidgitt moved to another service industry company, which he helped to build from around £6-7 million in turnover to approximately £20 million.
Lidgitt held shares in the company and, when it was ultimately sold, this provided him with a war-chest to begin his own business. Having built this company to around £3 million in revenue, Lidgitt sought to expand and the company made its first acquisition.
This first deal was for a solvent firm, but Mastiff soon began exploring acquisitions of distressed companies, acquiring an insolvent cleaning business with operations in London, Birmingham and Bristol and turnover of around £1.5 million. This was followed by a £3.5 million-turnover Southampton business.
Lidgitt amalgamated these firms with his own, centralising the back-office operations. This approach is one that the company has continued with ever since and is the foundation of its successful acquisitive operation.
Mastiff’s acquisition strategy
Lidgitt explains that Mastiff targets both solvent and insolvent businesses with a roughly 50/50 split. For solvent businesses, Mastiff looks for companies that have growth potential, but perhaps require a level of investment (either in technology or personnel) that the current owner is unwilling or unable to provide.
When acquiring insolvent businesses, the firms will have a solid offering that would benefit from Mastiff’s approach, but will have fallen into distress either through bad luck (such as the knock-on effect of a key customer collapsing) or poor management. In this situation, Lidgitt says, the owners will often still love what they do, but will be burnt-out due to the stress of managing a struggling company and highly motivated to sell – often for a low price.
However, whether a target is solvent or insolvent, they must all fit Lidgitt’s strict criteria, in order to ensure that they will slot into and benefit from Mastiff’s business model. Typically, the group’s acquisitions are asset-light service industry businesses, often with significant debts, but with solid cashflow.
As Lidgitt says: “If the business doesn’t suit my model… if the business doesn’t suit my people… it’s not worth buying it. It's not worth rocking the boat […] That is the only time I err on caution.”
A core part of Mastiff’s acquisition approach is to always have a large number of potential deals under consideration. Lidgitt compares this approach to sales, in which 100 companies may be approached, of which 20 will show interest and ten will agree to discuss a deal. From this ten, Lidgitt will aim to close around six deals and says he always has “one or two” in progress every week.
Closing a deal
Once targets are identified, Lidgitt will begin negotiations by approaching the broker or insolvency practitioner/administrator. However, after this initial contact, a central part of his approach involves quickly establishing direct contact with the vendor or owner, in order to gain as much information as possible about the state of the business and the reason it is up for sale.
This, Lidgitt says, is vital to establishing the firm’s true value, whether it is worth acquiring and, if it is, the price he is willing to pay.
He explains that a “good price” is one where he will start getting the sum he has paid back within two years. Any longer, in the fast-moving service industry, and the business may have lost a contract or started accruing losses, meaning the investment has not been successful.
The final step of closing a deal is to establish a structure in which payments are deferred for as long as possible – another example of an approach that is obsessive about day-to-day cashflow within the group. Lidgitt will offer a “reasonable” amount upfront (typically, he says, based on the business’ debtor book, which is then invoice discounted). This amount will sometimes be borrowed from another Mastiff company and repaid through invoice discounting.
The remainder of the acquisition price will then be paid out in staged, monthly payments to the owner over the course of two years. A resolute focus on cashflow means that Lidgitt always knows he has the money in the bank to make payments over the course of two years and, can provide a personal guarantee to the vendor if necessary.
This structured approach means that Lidgitt can, for example, pay £100,000 down for a distressed business with cash in the bank, plus a debtor book. The owner will get their money over the course of two years, during which time the acquisition will begin to turn a profit. The cash in bank gained upon closing the deal, meanwhile, can then go towards funding Mastiff’s next acquisition.
Overall, Lidgitt says that having this structure in place means that Mastiff’s acquisition strategy has become “easy”. While this may be simplistic, it is obvious that the company has developed a clearly-defined and highly efficient acquisition strategy which has enabled it to grow rapidly over the course of around 13 years. As Lidgitt says: “I’ve been buying for 40 odd years now and the quickest way to build a company is to buy and build and add.”
Buying insolvent companies is, of course, an inherently risky business and, as Lidgitt notes, it has both upsides and downsides. The core benefit of buying from an administrator or liquidator is, naturally, the low price for a business that may have solid potential (such as the £15,000 Lidgitt paid for a weed killing business).
As for the downsides, there is the simple fact that the company will have gone into insolvency for a reason (as mentioned previously, often due to bad luck or bad management). Lidgitt also points out that, when acquiring an insolvent business, you’re also acquiring its staff, meaning there are implications such as TUPE.
The best way to minimise the risks inherent in acquiring a company out of administration is to maximise the due diligence you perform beforehand. While acquiring a business from administrators is naturally a time-sensitive operation, getting as much information as possible ahead of doing the deal will mean that fewer skeletons come out of the closet post-acquisition.
The importance of gaining a thorough overview of the business is one of the key reasons that Lidgitt emphasises the value of speaking directly with the owner, as well as the administrator or insolvency practitioner, in order to fully understand the business and the reasons it has fallen into administration.
For Lidgitt, invoice discounting forms a key part of many of Mastiff’s distressed acquisitions. When acquiring an insolvent business with a significant debtor book, Lidgitt will sell this to a bank which provides him roughly £85 in advance for a £100 invoice.
Without invoice discounting, an insolvent business’ debtor book could quickly become a concern. However, by using invoice discounting, Lidgitt can immediately raise, for example, £85,000 up front from a £100,000 debtor pile, which instantly helps with the business’ all-important cashflow.
This approach has continued to bear results during the COVID-19 pandemic. With an acquisition that was ongoing at the time of the interview, Mastiff was acquiring a business that had paid off its COVID-19 loans, but recently secured a £50,000 recovery loan. Upon acquiring the business, Lidgitt could use this to pay the owner up-front, while knowing that, with the group’s solid cashflow, he could make the repayments on the recovery loan over two years.
Lidgitt says that distressed acquisitions now enable Mastiff to target insolvent businesses with up to £10 million turnover. Furthermore, with furlough now over and COVID emergency loan repayments due, distressed acquisition opportunities are rife and a cashflow-focused approach like Mastiff’s seems ideally suited to navigating the uncertainties that come with such deals.
Mastiff’s COVID spree
Over the past two years, BSR has written extensively on the wealth of distressed acquisition opportunities that have arisen during the course of the pandemic. Mastiff is a perfect example of a buyer that has used the crisis to acquire smaller businesses that are struggling, but could be totally viable, high-potential operations with the right management and investment.
The group also demonstrates how dealmakers have adjusted to the operational challenges posed to M&A activity by COVID, with Lidgitt, in his own words, having acquired 12 business “over Zoom” during the pandemic. Once these initial discussions have been remotely conducted, Mastiff’s structure means that Lidgitt can then send one of his people in England to conduct face to face talks with the vendor.
Mastiff’s acquisition strategy was, of course, in full flow by the time COVID-19 hit the UK in March 2020, but unlike many acquisitive businesses, the group didn’t slow down its activities at the start of the crisis. Having been in the UK to close a deal immediately prior to COVID-19, Lidgitt continued with his constant search for new acquisitions despite the onslaught of the pandemic.
Mastiff’s first pandemic acquisition was a Cornwall-based business that built and installed playgrounds. The company’s client base of schools and district councils put it firmly within Mastiff's criteria for acquiring contract-based firms within the wider service sector.
The group’s next pandemic acquisition is one of its most telling and shows the value of its approach to M&A. The business, which provided Christmas decorations for town centres and shopping centres across the UK, fell somewhat outside Mastiff’s usual operations, but still within the service industry.
The company had turnover of slightly under £1 million and was in receivership at the time of acquisition, but has since, in Lidgitt’s words, become “the jewel in the crown” of the group’s businesses and has developed strong synergies with other Mastiff companies.
Mastiff has completed numerous other acquisitions during the pandemic, including in sectors such as weed-killing, transport, road closure and landscaping. What’s more, with distressed opportunities on the rise as companies are hit by soaring costs, loan repayments and the end of COVID protections on insolvency action, Mastiff’s COVID-related activity is likely only just beginning.
Centralising the back-office
As Lidgitt explained, many of the businesses Mastiff acquires have owners that are highly motivated to sell. However, even with solvent acquisitions, one of the key attractions of selling to the group is their structure, which sees the back-office moved to Mastiff’s central operation. Whether the owner remains with the firm or is replaced, this model enables them to get on with the main function of the business, while knowing that all the paperwork and legal processes are being handled elsewhere.
Mastiff’s central back-office operation is comprised of a tight-knit team, many of whom have been with Lidgitt for close to a decade. The company has a dedicated cashflow manager, who, Lidgitt says, does cashflows “everyday, for every single business” in the group.
Explaining the importance of running a business by cashflow, Lidgitt said: “I run everything on cashflows. It doesn’t matter what profit you make or what losses you make – it will eventually – but cash is king. If you’ve got the cash in the bank, you can do something with it. If you know what you’re spending next week, then you know what you can spend on buying a business, or what you can’t because you’re paying the VAT, PAYE, the Pensions Regulator [etc. ...] So, you’ve got to understand your business, not just the products or the service that you’re providing, from a cashflow point of view.”
As well as this, the group has dedicated professionals dealing with wages and invoicing and a team of accountants. For owners who are burnt-out or struggling to balance the operations of their business with the paperwork, the opportunity to hand back-office responsibilities over to a specialist team and get on with the actual activities of the company will be highly attractive.
As for Lidgitt, he emphasises delegating wherever possible, commenting that he doesn’t run any of the businesses, but rather “sits on top of them”. As might be expected, the only element on which he takes a hands-on approach is cashflow, which he looks at every day to see what money is in the bank, what is coming in, what is being spent and why. Delegating the responsibilities of running the group in this way leaves Lidgitt with maximum time to spend looking for “the next venture”.
Stick to what you know
Throughout the conversation, Lidgitt repeatedly emphasises the importance of sticking to a sector you are familiar with and knowledgeable about when targeting acquisitions. Mastiff’s profile for acquisitions means it can target businesses that are seemingly highly diverse (landscaping, road closure, Christmas decorations and flowers, to name just a few), but operate largely on contracts, serving similar customers, such as hospitals, schools and county councils.
Contract-based work with reliable, public-facing clients is perfect for a business model centred around cashflow, because, as Lidgitt says, when a contract is properly managed a business can essentially keep it “for life”.
Despite the diversity of Mastiff’s services, Lidgitt points out that “It’s all the same work […] all around the same sort of customer”, adding that: “The customers are exactly the same. I know the customers. I’m in the service industry, I know the pitfalls in the service industry.”
Being aware of the pitfalls inherent in service industry work is crucial to the group’s success, enabling it to always prepare in advance for potential issues. Lidgitt’s wealth of experience means that he has the knowledge necessary to avoid potential pitfalls. He gives the example of always hiring 26 cleaners for a job requiring 20, due to the near certainty that some won’t turn up and that others will drop out during the job.
For Lidgitt, minimising pitfalls means avoiding businesses in industries “that you know nothing about” and sticking to a sector that you know. A perfect illustration of this is the fact that the only acquisition that Mastiff hasn’t been able to turn around was one that didn’t fit its strict profile: a business in the highly-regulated domiciliary care sector.
Sticking to one sector, albeit an extremely broad one, means that Mastiff has been able to develop numerous valuable synergies between companies in its portfolio. During COVID-19, it used the highly-developed marketing division of its playground equipment company to help a flower business pivot to being a largely e-commerce operation.
Another example is a perfect encapsulation of the synergies that can be unlocked by acquiring businesses that are diverse, yet complementary. After acquiring the Christmas decorations business, Mastiff acquired the company’s main contractor, a transport business, which was struggling during COVID-19. After the original owner of the Christmas decorations business left, the owner of the transport business replaced him.
The transport business owned two lorries fitted with cranes and, this fleet was then grown to six trucks when Mastiff acquired a second transport firm. The group then moved to acquire a business that organised road closures for the movement of heavy equipment and exceptional loads. Specifically, the company closed roads to enable equipment such as x-ray machines to be installed in hospitals, a job which requires cranes in order to install the equipment through alternate entry points at busy hospitals.
Following this acquisition, Mastiff now runs the whole operation. Owning the road closure company and using trucks from its transport operation to move and install the machinery.
Distressed acquisition opportunities are growing in the UK in the wake of COVID-19 and amid rising inflation. With solvent businesses perhaps struggling to generate organic growth in these conditions, distressed acquisitions could offer a perfect alternative route to growth.
By sticking to businesses within a highly diverse, but interconnected sector, Mastiff has been able to build a group of small businesses offering a wide range of services that nonetheless share numerous synergies and similar business models.
This has enabled it to impose its cashflow-centric approach across close to 30 companies and means that it can target both solvent and insolvent acquisitions, providing the business fits within its criteria.
For buyers that are perhaps less accustomed to acquiring insolvent businesses, the insights Lidgitt has offered could prove invaluable in demonstrating how to identify and execute successful distressed acquisitions, how to avoid the pitfalls inherent in acquiring insolvent businesses and how a buyer can achieve acquisitive growth through both solvent and insolvent acquisitions.
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