Businesses hoping to pass on the mantle to management teams may have to look away from management buy-outs, new research suggests.
The amount of capital being provided for smaller management buy-outs (MBOs) has dropped by £4.4 billion over four years.
Findings from law firm Hugh James shows that the value invested by British Private Equity and Venture Capital Association (BVCA) members in MBOs has fallen in absolute terms, as well as the proportion of all UK investments.
During 2007, MBOs were worth £7.3 billion, some 64 per cent of the total sum injected in the UK by BVCA members. For 2011, the two figures had fallen to £2.9 billion and 45 per cent.
Hugh James says that this could mean that small and medium-sized enterprises (SMEs) will have to take an ‘innovative approach’ towards succession planning as the ‘baby boom’ generation prepares for retirement.
Further figures from the law firm finds that, in 2010, 860,000 businesses highlighted a need to close or transfer the business to new owners in the next five years.
At the smaller end of the spectrum, MBOs worth £10 million or less were found to be hit hardest. The total sum of UK private equity investments in the category fell from £707 million and 6 per cent of the total invested in the UK in 2007 to £98 million and 1.5 per cent of the total in 2011 (see table below).
| Year | Amount |
|---|---|
| 2007 | £707 million |
| 2008 | £35 million |
| 2009 | £90 million |
| 2010 | £147 million |
| 2011 | £98 million |
Gerallt Jones, partner and head of corporate and banking division, comments, ‘An owner approaching retirement can be bad for a company’s future as cash generation is prioritised over long-term investment.
‘Older owners are understandably less willing to take the risk to launch new products or enter new markets, and may sometimes allow the business to take second place.’
Jones adds that, traditionally, an MBO can provide a route for the younger management team to buy into the business but that a lack of funding available for this mechanism means that businesses need to start planning earlier to work out alternatives.
As an alternative, Hugh James suggests:
- A phased MBO, where the management team buys the owner out in a series of tranches that can be funded more readily
- An MBO backed by the business seller, to be repaid from future profits
- An MBO backed by asset finance
- A trade sale or joint venture, possibly involving a competitor, supplier or customer
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