The traditional routes of exit for vendors include a sale to a trade purchaser, an IPO, or in the majority of cases a sale of the business to an existing or incoming management team, which will typically be backed by a Private Equity (PE) firm.
MBOs continue to be an appealing proposition across all markets, offering management teams more control over the business and incentivising them through equity. For the shareholders, not only is the transaction attractive financially, but they offer flexibility to meet the needs of either a full or partial shareholding sale.
Is an MBO right for you?
Shareholders and management teams should weigh-up whether an MBO is the right strategic decision for them personally. For incoming investors, a strong management team provides an attractive succession plan as they will likely already handle much of the day-to-day activity of the business. The transition from being a company employee to company owner is very different. Typically, new management will hold senior positions prior to pursuing an MBO and will not be alien to making strategic decisions. However, there will be increased risk and the ultimate responsibility of business performance will lie with the buyout team.
Seeking quality and experienced advice from professionals who have been through the challenges and requirements of carrying out an MBO is recommended prior to considering a transaction. Having a robust strategic plan, obtaining the right type of funding, and achieving a fair valuation are three areas of particular importance.
Is there a clear and realistic strategic plan set out?
A key part of ‘investor readiness’ is management’s ability to show they have a clear pathway to achieving their strategy. PE investors will often expect to be able to refer to the ‘100-day plan’ during the due diligence process and monitor progress against this post transaction. The plan is not simply about reducing costs but focussing on creating value in the business and addressing key initiatives to increase efficiencies.
In the majority of successful MBO transactions, the current management team will be well-embedded in the business and will have the skills and experience to encourage the support of an investor. Particularly in the case of PE firms, funding decisions can often place significant importance on the quality of the management team. It is important to consider any skill gaps within the current team and how these will be bolstered if required. It is also vital to ensure the business has a capable in-house finance function, be it internal or outsourced, with strong financial management reporting and processes in place.
Few MBOs complete without some unexpected issues arising. However, typically the due diligence process should highlight such matters. Our advice would be either to address these pre-deal or make resolving them a key element of the strategic plan.
What sources of funding are available for MBOs?
A number of funding sources are available to support an MBO, including (but not limited to) PE investors, traditional banks and vendor financing. Each of these options entail differing costs, complexity and potential value-add.
PE houses are likely to provide a closer and more supportive role than other funding sources. Investors and the incoming buyout team will be aligned through their respective equity holdings, and therefore each have a vested interest in the company’s success. Additional skills and experience are applied to the Board through the introduction and appointment of a Non-Executive Director and / or Chair with particular knowledge of the relevant sector. In most cases, investors will also appoint one of their own experienced executives to the Board.
The PE exit horizon is usually three to five years, reflecting the more patient nature of this source of funding. Follow-on investment is also commonplace, with internationalisation and / or buy and build strategies being two examples of support cases.
How should the topic of valuation be approached?
It is strongly advised that management teams obtain external advice when setting a realistic valuation for the company, particularly given the emotional attachment the founders or exiting shareholders will have to their business. Engaging an independent third-party expert will assist all parties in achieving a fair outcome.
Outside advisors also often provide a suite of services over and above valuations. Making use of these advisors to undertake the project management of a transaction ensures management teams can remain focused on their day-to-day role during the process.
Undertaking a MBO can be a daunting prospect, with detailed thought and planning required. However, it is also a venture that can be an extremely rewarding. At Maven we specialise in providing management teams with the capital and support they require to execute an MBO and we are always interested in meeting with business owners and managers thinking of undertaking this process. Please get in touch at funding@mavencp.com or apply directly here.