What was on the table?
The Risk Capital Partners-backed MBO of Brighton-based musical instrument retailer GAK, for an undisclosed sum. We went to market in February 2021, signed heads of terms in May and completed at the start of September. We were delayed slightly as we needed Financial Conduct Authority approval because the company offers finance to its customers. Debt facilities were provided by GAK’s existing bankers.
How were you introduced to the company?
GAK was founded in 1992 by Gary Marshall. It has one retail store in Brighton, which has a high profile in the area and among musicians. The main warehouse is also in Brighton. Marshall grew the business from a market stall to a shop, brought in mail order and then grew it online. It has turnover of around £40m, with 70% of its business now online.
Marshall had handed over the day-to-day running of the business and sold a stake to co-managing directors Max McKellar and Ian Stephens several years ago, and had taken a non-executive role. The investment from Luke Johnson’s Risk Capital Partners (RCP) made it the majority shareholder. Johnson loves Brighton and has other investments in the area, including Brighton Pier. The GAK team liked the idea of having a well-known investor who would bring publicity to the brand – RCP also made the best offer.
Who were the advisers?
We were initially introduced by GAK’s accountants, Watsons Associates, 10 years ago. Management had considered selling at various times, so I kept it on our prospects list. We were asked to pitch and won the mandate. GAK management and shareholders were advised by us as lead advisers, Coffin Mew for legals and Watsons Associates for tax. RCP was advised by RSM and Irwin Mitchell.
What were the challenges?
We had serious interest from many private equity investors. They were equally split between those who wanted the business to prove that its growth was not just a COVID-19 bounce and those who actually delved into it and understood that key to the business was the ‘stickiness’ of customers. The business had gained significant new customers in the UK’s first lockdown in 2020. If new musicians get through the six-month pain barrier and can then play a tune, they become hooked and want to upgrade or buy something new, while some want to build up a collection.
We looked at historical data about new customers and their buying patterns. The key to the deal was a complex data pack of KPIs, which demonstrated the conversion rates of new customers to become repeat customers and their high lifetime value. GAK had to capture the data to prove it, which supported assumptions about the future growth of the company. In the end, this was more important than the financials.
Were any lessons learned for the future?
In any online business, data is key and owners of companies need to understand their key drivers and collect the right data in the right way from the start. They can then use these statistics to give credibility to their growth plans and forecasts. A quality chief technology officer is a great asset for companies and is increasingly important.
You also need somebody in the corporate finance advisory team who understands the granular detail of how to approach this. We were able to work with the in-house IT team at GAK, to make sure the data was presented in the right way to support their assumptions about growth.
The CV
Adrian Alexander is a corporate finance partner at FRP Advisory. In 1982, he joined Honey Barrett Accountants in Eastbourne, where he trained as a chartered accountant. In 1989, he joined Grant Thornton’s Gatwick office as corporate finance manager. Then, in 1993, he joined Mazars in Brighton, to set up and grow the firm’s corporate finance offering. He became head of corporate finance for the South East in 1998. In 2017 he joined FRP, a Corporate Finance Faculty member.
Recent deals
Sale of Reef Environmental Services to BPR for an undisclosed sum in October 2021
Ashridge Capital-backed MBO of horticultural specialist Fargro for an undisclosed sum, completed May 2021
