How to Build and Grow a Business for a Successful Sale – Mike Srokowski
I’ve recently interviewed a number of Executives across various niches of the Insurance market.
Today’s interview is with Mike Srokowski on How to Build and Grow a Business for a Successful Sale.
Mike is Non-Executive Director at PyTerra, PtTerra and NXD Ltd.
Mike was the founder and Chief Executive Officer of Validus-IVC, established in 2007 to provide claims management and analysis services to the UK motor industry. The business evolved to develop its own proprietary claims management portal that supports the automation of motor claims processes for insurance providers in UK and overseas markets.
A Private Equity firm (LDC) backed a MBO in March 2013 and the business was subsequently sold in 2018 to Verisk Analytics.
Mike studied Mechanical & Production Engineering at KCFE and holds an MBA from the University of East Anglia Business School.
How did you come to be working in the claims market?
Via quite an unconventional route really! My early career was with British Gas as an engineering trainee and then within the offshore Oil & Gas industry as a commercial diver. After ten years’ diving, I moved into an onshore management role and in 2000 had already decided to change careers, when an opportunity arose to join an accident management company. In 2002 I set up my own credit hire business, Hire4U Ltd, which I ran successfully until 2007.
How did the original idea for Validus come about?
At Hire4U we had a great credit hire team who genuinely tried to do mitigate cost whilst at the same time doing their best for claimants. It became quite clear that in so many cases the antagonistic relationship between insurers and CHOs only served to increase costs on both sides, so in mid-2006 we decided to develop a solution that we believed would help remove the friction and reduce cost.
When you first set up and founded Validus what were your original plans and goals?
Pleasingly, most members of the team bought into the concept and transferred across to the new business. It was undoubtedly a leap of faith on their part, because we had no proven system, no office and no clients! Credit at this point must be attributed to two senior guys at Hire4U, who both worked extremely hard to map out a process that we felt would work for both sides of the credit hire divide. Their input really gave the rest of the team confidence that we were on the right path. The next step was to convince an insurer that the process would work and that we had the necessary resources to deliver a credible solution, which we thankfully managed to do.
How did you set about achieving those goals?
Once the concept had been proven, we found that our service appealed to quite a few insurers and we began to make a positive impact on the industry. Although the cash inflow enabled us to expand, our strategy of maintaining high quality output standards always was the key to our success and we placed stringent focus on recruitment and training. We also invested significantly in automating as many elements of the claims process as possible by developing our own claims software, which enabled us to resolve large volumes very efficiently.
It remains a source of satisfaction that at one particular CHO conference it was formally acknowledged that Validus was seen by CHOs as a source of ‘good’ and not ‘evil’!
Did you have to amend or reset those goals at any point?
Yes, often! Changes to the legal landscape, credit hire precedents and the approach insurers took in dealing with such developments meant that we needed to revisit our strategy on a regular basis.
What mistakes did you make along the way?
Thankfully, we didn’t make too many. I think we were lucky in that we had a very dedicated team of individuals who tended to work cohesively to achieve goals and produce the results we needed. That said, in the early stages of our business the variety of opportunities open to us were wide-ranging and I think as CEO I could perhaps have encouraged the team to exert more direct focus on delivering in-scope software development milestones rather than allow them to embark on new initiatives.
What did you learn from that?
That delegation is OK up to a point. Even when you’re delegating to trusted co-directors it’s important to ensure that every member of the team is following the same agenda.
Did you have any mentors who helped you along the way?
Yes, most definitely. When we introduced PE investment into the business, I gained the support of an experienced chairman, who was always on hand to give advice on issues or sense-check my thinking. I also found that many of the claims directors I dealt with were great to bounce ideas off. I think the role of the CEO can by its very nature be one of isolation, so having an independent mentor is quite crucial as a means of validating your thought processes.
How did the claims landscape change during that period of time?
Although there were several changes to legal precedent relating to the credit hire and subrogation market over the years, the most obvious change to the landscape was driven by the CMA Investigation into Private Motor Insurance that culminated in 2014. The investigation took over two years to complete, a period that was difficult for us as insurers were understandably reluctant to make any strategic decisions. We were pleased when the CMA findings were published with recommendations that motor insurers looked towards technology as a means of improving collaboration and reducing frictional cost.
What was the greatest challenge you faced along the way?
Transposing our theory into practice and encouraging the industry to behave collaboratively by using our subrogation platform, took a lot longer than we anticipated. ‘Transposing theory to into practice’ in a market where motor insurers compete so aggressively was never going to be easy. Eventually though, most saw the logic and we did well to engage the majority of motor insurers in the use of our platform
What were some of the tough decisions you had to make?
I think the toughest was deciding to sell part of the business to private equity in 2013 as a means of re-setting our board and exiting some of the original shareholders, who were all board members. It gave us the opportunity to bring in a new CTO, who transformed our approach to software development.
How did you originally finance the business?
Through my own private funds initially, followed by investment raised via my personal network of associates.
How did you select a private equity partner to work with?
We had a ‘beauty parade’! Our appointed advisors arranged for us to meet several PE houses and listen to their various pitches. The final choice came down to a couple of key factors, obviously the financial offer was important, but equally the belief amongst the team that the selected house had the wherewithal to help us achieve our long-term strategy.
How do you decide and negotiate a good sale price for all parties involved?
The process of choosing a PE house is designed to establish some competitive tension, with each being asked to submit its best proposal based on the business plan and forecast EBITDA. Thereafter negotiation becomes the predominant characteristic until a deal that suits all parties is finalised.
Is there a certain amount of luck and good timing involved to achieve the multiples required on selling a business?
From a seller’s perspective good timing certainly helps. Buyers gain confidence from seeing the business meeting its targets, so engaging with them as the business is at the beginning of a clear upward trajectory is very much in the sellers’ best interest. Whilst the timing impact of micro-economic factors on multiple values are a key consideration, much will also depend on whether there is a strategic alignment between the two businesses and sellers looking to maximise multiple values should be aware of the added value such synergy can create.
When negotiating a payout out on future earnings what needs to be considered?
Whether the proposed F/E payout targets are reasonably achievable and also that there is clarity on both sides relating to the contractual conditions that govern any payment mechanism.
What advice would you give to an InsurTech start up looking to achieve funding?
Firstly that the ‘solution’ they are creating is solving a financially quantifiable problem. Investors will want to see proof that there is growth headroom and that the technology is a product that the market would be inclined to buy. There are numerous examples of white elephant technology/AI platforms that have attracted millions of pounds of investment, but which have failed to address any genuine industry need. Investor proposals should clearly set out the financial benefit case and should be written on the basis that ‘need-to-have’ solutions, which can reduce cost and enhance productivity, will generally always trump ‘nice-to-have’ solutions – that don’t!
Secondly, there are now a considerable number of innovative non-institutional funding sources in the market that specialize in technology propositions, including some amongst UK insurers. Start-ups looking for funding should be prepared to do their homework and ensure that their pitch ticks as many of the potential investors’ policy boxes as possible.
How do you see the claims market changing in the future?
Over a relatively short period of time, technological advancement within the industry has been OK, but not spectacularly impressive! There has been steady progress in many areas, particularly in back-office elements of claims processing, but I think the digital supercomputer that most of us carry around in our pockets still has huge scope for enhancing the customer claims journey.
What’s next for you?
I am currently an independent non-executive director of two companies and an investor/board advisor for a third. I am also elected president of Norwich RFC.
Right International have a proven track record of identifying and sourcing the top talent across various niches of the insurance market. If you are looking to add to your team now or in the near future, I would welcome the opportunity to help – please contact me.
If you have any ideas for future articles and would like to be involved, please let me know and I would welcome any feedback.
Please look out for more leadership blogs coming soon!
All the best,
Founder & MD
Right International Insurance Headhunters