Management buyouts (MBOs) may be more attractive now than at any time since the early 90s, and the next 12 months may present the opportunity of a lifetime.
At the right price, with the right funding package and the right approach, the success rate can be high and the upsides enormous for a strong management team which takes control of the business they helped to shape.
Factors favouring MBOs include businesses which are:
- part of a larger group experiencing distress or heading towards administration
- non-core subsidiaries
- facing succession issues and the owners need an exit
- experiencing dissent among shareholders
- small public companies suited to being taken private
- owned by senior management and their private equity backers, and some or all are happy to be bought out by junior management
The management team should be ambitious, central to the business, have a proven track record and have gained the owner’s trust.
The major advantage for the MBO team is that the cost of the business is likely to be at its lowest point in years. For the vendors, an MBO means selling to a known and trusted team. This often means a definite buyer, a quicker sale, little prospect of due diligence ‘surprises’, and a smoother legal process for matters such as warranties and indemnities.
Preparation
The key initial task is preparing the business plan with detailed financial projections for the first three years. These need to be in the form of integrated trading, cash flow and balance sheet forecasts setting out all assumptions used and the reasons for them.
The plan must demonstrate that the business can afford the desired funding package and can meet any restrictions placed on it by the funders.
Funding
The major stumbling block currently is securing funding. But the success we are having with funding MBOs currently suggests that funders are still supporting deals they believe in, provided they are very well thought through and presented. Therefore, time spent on preparation and developing a robust business plan will pay huge dividends.
MBOs are typically funded by a combination of equity and debt finance.
Debt finance takes many forms and are tiered in order of security available to the lender and consequent interest cost. Debt ranges from best-secured debt, the cheapest, to equity investment. Total debt funding available to a business tends to be in the range of up to 2.5x current/expected EBIT or EBITDA for a typical business.
Equity finance includes the management’s own contribution, which should be enough to show full commitment but not leave a family destitute if the business fails. The total contributed by the team is more important than the amount from an individual member. The vendors may be willing to make personal loans to the individual team members.
After an MBO is completed, the management team has a very strong incentive to grow the company profitably.