How to successfully unlock a Management Buy-Out

Management Buy-Outs (MBOs) are one of the key ways to deliver growth for a business and to provide an opportunity for progression for entrepreneurial individuals keen to make the move from management to ownership.

The market for MBOs has grown substantially and it is predicted that trend will continue throughout the second half of 2020 and into next year.  With fewer trade acquirers in the market, both privately owned businesses along with large UK and overseas corporates are looking to sell businesses to incumbent management teams that are keen to take control of their own destinies and deliver scale to their operations, whilst building capital value for themselves.

During a recent webinar organised by the ICAEW, Partner and Head of RG Corporate Finance (RGCF), Carl Swansbury, and Duncan Reid, Corporate Partner at Weightmans, discussed how management teams can unlock the potential of their businesses through an MBO.

Carl said, “With the level of liquidity in the market, largely from debt funds and Private Equity houses, this is a great time for management teams to consider acquiring the businesses they run, via an MBO.”

Businesses that are prime for an MBO often share a range of similar characteristics. At their core, these businesses have strong, experienced and committed management teams that are willing and able to take a measured financial risk, which will enable them to take control of a viable and scalable standalone organisation they are currently running on behalf of its existing shareholders.

A recent example was the MBO at technical and engineering staffing business TechConsult UK, where RGCF advised its Managing Director and Finance Director on the acquisition of the business from its parent company TechConsult Norway.

Frequently MBOs are trigged by a strategic decision from a willing, supportive and motivated vendor, who have a reason for selling, which may include retirement or succession, the sale of a non-core business or division, distressed assets or insolvency. 

This could also include vendor initiated MBOs, which was the case with the VIMBO of international technology company, Venturi Ltd where RGCF advised the existing management team, who acquired the business from two of its shareholders, with funding provided by Caple.

MBOs are also prevalent in sectors where there may possibly be a limited buyer pool due to the nature and size of the business or its circumstances.

Of course, any business that could be subject to an MBO, or any funding or investment-supported acquisition, needs to be able to provide equity returns or service the repayment of debt or vendor deferred consideration.

When embarking on an MBO there are three key areas to consider: financial, legal and operational.

One of the key financial considerations is how the business would be valued as that valuation will need to be delivered upon.  Funding decisions will need to be made also as MBO transactions are chiefly financed by third parties, either via debt funds, clearing banks or Private Equity investors.  Management teams will need to establish what form of funding they can access as it will dictate the structure of the transaction.

RGCF has effective relationships with a wide portfolio of funding providers, which supports the smooth delivery of MBOs.  Among them is Shard Credit Partners, which is an innovative provider of alternative finance for UK SMEs.  Two recent MBOs advised on by RGCF, the acquisition of battery manufacturer Alexander Technologies Ltd by its incumbent management team from its US-based private equity house owners and the purchase of a power generation and aerospace solutions division of a multi-national organisation by its UK-based management team to create GadCap Technical Solutions Ltd, were both funded by Shard Credit Partners.

A benefit of an MBO is that the management team will have an intimate knowledge of the business’ financials.  This will reduce the need for financial due diligence with only the third-party funder requiring a level of due diligence.

MBOs often attract a lower sale price, which is attractive to management teams and although less than a vendor would achieve from a trade sale, does provide the continuity and succession that founding shareholders often want for a business they have founded and scaled.

This emotional element of a transaction should also be seen as an advantage to successful completion.  There is often less execution risk with an MBO, which also reduces the chance of issues occurring during DD and negotiations.

Keeping a transaction largely ‘in house’ through an MBO prevents the need for vendors to disclose sensitive business information to competitors, which would be the case if the business was being sold to a trade buyer, particularly in a niche market.

A trade sale additionally brings more vendor risk and the due diligence is often more onerous.  And, because the management team knows the business, the seller has usually to provide fewer warranties for an MBO.

Duncan said, “If speed of transaction delivery and a clean-break are key to a vendor, which may be the case ahead of possible changes to the capital gains tax regime in the Chancellor’s autumn budget, then the ‘lighter’ touch approach to the legal process can be highly attractive. However, it is important that there is an early understanding that the funders involved in the MBO are happy to proceed with the deal on this basis as some funders will want a full due diligence process carried out, backed by a comprehensive set of warranties.”

Operationally, there are some challenges, which need to be managed during an MBO.  Notably, there is the opportunity for management to be distracted from the running of the business while they progress the transaction, which could impact valuation as well as day-to-day operations.

Management teams also have to consider that if the MBO is debt-funded that future investment in the business could be limited until the debt is repaid.

If the transaction is as the result of a disposal by a larger group, management will also have to consider how it will operate independently after the MBO.  To successfully operate as a standalone business, it will require back-office functions that it previously relied on its parent company to provide.   These will need to be established either in-house or using outsourced providers.  There is often a transition period to enable the business to access its former parent’s services until it has its own functions in place.

Among the range of operational positives that come with an MBO include increased employee engagement as there is a greater sense of ownership, even from staff who are not part of the acquiring management team.

Carl concluded: “An MBO can be a real balancing act for management teams when achieving the equilibrium between working on a business and working in the business, but they offer real potential for personal and financial growth for those willing to take the challenge.”

“It’s important to get advice on the ‘art of the possible’ before approaching the subject with shareholders and consider what is driving an MBO.  Is it the opportunity to own and grow a business, or is there an element of fear if the vendor is planning on disposing of the business?” 

“If, however, it is done for the right reasons, an MBO is a great option for all parties and provides the management team with a platform to control and scale the business, whilst benefitting financially from the value they create.”

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