To launch its report on Management Buyouts, Coutts brought entrepreneurs and corporate financiers together to share their experience of buying a business from and selling a business to management. In the Know reports on the launch and hears advice from the guest panellists.
Read the Coutts report on Management Buyouts.
Traditionally, the sale to a trade buyer has been seen as the most effective means to obtain the maximum possible value when a business is put on the market. The logic is simple. A competitor seeking increased market share and economies of scale will often be prepared to pay top dollar if the fit is right.
In contrast, a sale to the management team has been perceived as something of a minority pursuit -a route taken by vendors who are prepared to sacrifice some value in order to pass on the business they’ve built to managers whom they know and trust.
That perception is changing. Speaking at the launch of a Coutts' report on MBOs, head of the Entrepreneur Client Group, Andrew Haigh noted that deals on offer from trade buyers have latterly become less immediately attractive. "In the current climate there is much less willingness to pay large sums up front, so a deferred consideration is built into the deal structure. At the same time there is also a reduced appetite to pay large amounts for assets at a time when valuations are falling."
Against this backdrop, MBOs have become a more attractive option. With the one off payment no longer common, management teams and their private equity backers have an opportunity to offer owners deal structures that can be as attractive as those offered by the trade, often with a minority stake offering owners a share of the upside in the longer term. In addition an MBO provides some assurance that the business built by the vendor will be, to some extent, preserved rather than swallowed up.
Aware that the MBO option remains something of an unknown quantity for a great many entrepreneurs, Coutts launched its report by bringing together a mix of corporate financiers and entrepreneurs to discuss their own experience. When asked about the key elements for buyout success, our panellists offered the following advice.
Focus on succession
Mike Norris of business advisory organisation called The Alternative Board pointed to the importance of having the right managers in place ahead of implementing an MBO. "The best advice that I can give is that you hire the best MD or CEO that you can afford. Indeed, even if you can’t really afford him or her you should still go out and hire them", he says.
There are at least two very good reasons for having a good MD at the helm. First, any sale that’s backed by private equity will see the whole management come under the close scrutiny. Understandably, the quality of the CEO will be a determining factor in the willingness of investors to provide finance.
Equally important, the presence of strong CEO - other than the owner - will provide investors with the assurance that the company isn't a one man band. "You can't be too owner-centric," said Michael Norris. "You have to get people to run the business with you in the foreground."
Get the housekeeping right
Mike Smith, an entrepreneur who has been involved in a number of buyouts, stressed the need for companies be well-prepared when entering the MBO process. "Make sure your house is in order. Make sure everything is dotted and tailed. You have to have solid results, solid audit, and management and a people plan in place," he said.
One advantage of selling to management is their knowledge of the business. Unlike a trade buyer, managers will understand the opportunities and the potential problems that lie behind the management accounts and forecasts. However, that doesn’t mean the due diligence process will be less onerous. If private equity investors are backing the deal, they will want to get under the hood and fully understand their investment. It’s vital then that the systems, processes, historic figures and projections stand up to examination.
Allow time
Grooming a business for sale, either via a trade sale or an MBO can take many years, but as Dan Wright observed the MBO process itself may last much longer than expected. That's partly because of the various elements that make up the journey. Even raising the possibility of an MBO can be sensitive matter. Employers can be reluctant because they fear the disruption that could be caused by negotiations that open well but fall through at a later point. From the management side, it's not always easy to choose the right moment to approach an owner with a buyout proposal. In some cases the answer will be an immediate 'no' with a 'yes' following two or three years down the line.
But even if the principle of buyout has been agreed, vendors and buyers should be prepared for a protracted series of negotiations, due diligence and last minute contractual amendments. "It always seems to take longer than you think," says Entrepreneur Dan Wright. "And for some reason it always seems to end at 4.30 in the morning in the offices of your lawyers."
Do it
Andy Currie of Catalyst Corporate Finance had some very simple advice for the management team. "If you get the opportunity to buy the business, just do it," he says. "Unless you're a footballer or a pop star, you won't get rich unless you own your own business."
