How to complete a successful MBO

Andrew Craig, partner at Maven Capital Partners says there has probably never been a better time for management teams to seek backing for an MBO.

According to recent figures from accountants Moore Stephens, management buyout activity rose sharply in 2017, up 20 per cent year-on-year, and has had a strong first half of 2018 too.Here are the key factors ambitious management teams need to consider when they are seeking backing for an MBO.

Secure the right funding

There are various sources of financing available to support management teams in undertaking an MBO – banks, subordinated debt providers, private equity and vendor financing among them. Each has different costs, requirements and potential benefits, so it is important to choose the right funding model for the transaction and the future direction of the business.

Private equity funding tends to be more patient that other sources of investment, with PE houses remaining invested for typically between three and five years, whilst playing a very close and supportive role in helping each business achieve its plans. While a management team will work in partnership with additional investors in the business, than if they took a bank loan for example, the additional expertise and support private equity houses can provide can prove pivotal in the success of the business. For example, a private equity house in addition to one of their own experienced executives joining the board will also appoint a Non-Executive Director and/ or Chairman who will typically have a wide range of skills and experience of helping to grow businesses, these candidates will also have specific sector knowledge. PE houses will also be able to provide additional follow-on investment to help execute a buy & build strategy to help the business accelerate its growth.

Agree a realistic valuation of the company

Setting a realistic valuation for the business is an important aspect of any MBO and typically requires outside advice. An MBO is still an acquisition and the seller may well be the founder of the business. Having an external adviser that can help negotiate the sale to achieve a fair valuation for all parties is often the best solution and they can also help project manage the transaction to ensure that management teams are able to continue to run the business during the process.

Have a clear management structure

The team behind an MBO should have clear roles and responsibilities. Even if each member of the team is investing the same amount of money there must be clear leadership. One member of the team will typically assume the role of CEO and take the lead in shaping and articulating the business’ growth strategy to help convince potential backers that the management team have the requisite skills required and can demonstrate that they have developed a clear vision for the business and its future prospects.

Further reading on MBOs

Get the shareholder agreement right

A crucial, and often overlooked, aspect of any MBO, is putting in place a comprehensive shareholder agreement. This will address a number of key shareholder points including what happens to the equity when a shareholder manager leaves the business for any reason (known as the Good Leaver / Bad Leaver provisions). These provisions will document what happens to the equity of a departing manager under a wide range of scenarios and it is essential that both parties take legal advice on these matters as it is key to ensure that there is alignment if interest between the managers and the investors from day one.

Ensuring proper thought is given to the shareholder agreement at the outset helps to minimise potential areas of conflict or tension within management teams and helps to ensure that the focus can be squarely on driving the business forward and delivering its planned growth.

Be prepared

Few MBOs complete without some unexpected issues arising, for example the due diligence exercise may highlight some issues that will need addressed, these are either rectified pre-deal or form part of the 100-day plan.

Key to moving from the initial interest shown to closing the deal with any investor, is already having your house in order. Therefore, working with experienced investors or backers, and getting the right advice, is crucial. They will have worked with a wide variety of business types and sectors and will be aware of all the issues that can typically arise, so can help  to ensure that potential pitfalls are identified early and dealt with ideally prior to due diligence commencing.

The 100-day plan

PE houses will often refer to the 100-day plan during the due diligence process, this is a key document and will focus on what needs to be addressed post deal within 100 days. This will focus on the concept of value creation and the key initiatives that require to be undertaken to achieve an increase in profits and capital efficiency of the business. Contrary to popular belief this is not just about reducing operational costs but will focus on how to grow top lines revenues by developing new products, entering new markets by focusing on exporting and upgrading or improving IT systems.

The next level

There is plenty of institutional money looking for the right home at the moment. Some estimates suggest there is as much as $1.7 trillion (£1.3 trillion) globally waiting to be invested. There has probably never been a better time for ambitious management teams to seek backing for an MBO and, with access to investors/backers with the right experience, take their businesses to the next level.

Maven has a long heritage in MBOs and was itself the product of a successful MBO in 2009, when the senior members of the private equity division of global investment house Aberdeen Asset Management bought out that business. Over the past 10 years we have backed over 30 MBOs and have provided follow-on finance to a number of these businesses to support their buy & build strategies.

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