Management buy-outs (MBOs) are the brainchild of a previous recession. Invented in the early 1980s and the catalyst for the birth of the venture capital and private equity industry that provides the finance to back them, they are a solution to selling non-core subsidiaries to management in a depressed market where there were no other buyers.
To reenergise the economy, we need to see more of these private equity and venture capital backed MBOs right now. They work for the seller (usually a larger parent company or a retiring owner) as they generate much needed cash quickly and with (relatively) little fuss.
They work for the buyers as they get ownership of their company and can bring their own ideas without the dead weight of corporate bureaucracy. Also, importantly for buyers, the prices for company purchases are now reasonable.
Statistically this is backed up by research undertaken by Experian and the BVCA which shows that venture capital-financed businesses have stronger turnover growth. VC-backed companies trebled sales compared with more modest growth at comparable companies over a four-year period between 2006 and 2010.
Job creation was also much stronger within VC-backed companies, with an 80 per cent rise in employment over the four-year sample period. In comparison, other enterprises saw very little change in overall employment numbers.
Another BVCA study conducted by the Centre for Management Buy-out Research revealed that private equity-backed buyouts showed a stronger economic performance in the period before and during the recent recession than a matched sample of private and listed companies.
Certainly, we know from our own personal experience with Panoramic that you work harder and better when it’s ‘your company’, this is definitely an influencing factor. Consequently, the economy benefits from this injection of energy.
Also, compared to many other entrepreneurial opportunities, the good thing about an MBO is the fact that the management team knows the business; it already has customers, contracts, resources and IP etc. Management also knows the company well including the strengths, weaknesses, opportunities and threats, so it’ not a standing start.
A MBO provides management, and potentially some or all of the employees, with an opportunity to own the company they work for, and creates the opportunity for personal capital growth. Appetite for this kind of deal is strong in today’s climate, with flexible approaches to structuring transactions including:
- Renewed access to equity funding
Funds like Panoramic are looking for good MBO opportunities to back.
- (Some) access to debt financing
Traditional debt financing is more difficult, however there are other ways to help fund a MBO. Asset-based lenders have become very active and it is becoming more common for the seller to accept a deferral of some of the purchase price by effectively providing a loan, often on more flexible terms than a high street bank.
- No need to remortgage
Funds realise that there is less spare cash out there and the traditional route for management equity (remortgage) is challenging. However, at Panoramic, we look at funding MBOs through partly paid shares, which give management their equity stake in the business but with payment deferred.
Related: The golden rules of a management buyout – There are a number of key principles common to every successful management buyout. To maximise your probability of success, critically assess your business against, and align your actions with, these golden rules.