Strive for a perfect MBO

With corporates divesting and vendors rethinking exit strategies, now is the time for ambitious management teams to step up to the plate.

GrowthBusiness meets the managers-turned-bosses who know the pitfalls to avoid when striving for that perfect MBO.

Make no mistake, leading a management buy-out is a fearsome test of negotiating skills, business acumen and nerves.

That said, the rewards and sense of satisfaction from calling the shots should make the high stakes worthwhile, especially in the current market, where vendors’ pricing expectations are still subdued and meaningful financial backing is available from private equity firms and even banks.

Good deals may be there for the taking, but you’ll still have to ask yourself: how much do you want it? Ed Macnair, who is now the CEO of software company Overtis, vividly recalls the ups and downs he experienced when leading the MBO of Marshal from NetIQ.

‘It is a rollercoaster emotionally, and you and your team need to be prepared for that,’ he says, noting how the owners of Marshal’s parent company spent six months deliberating on whether to accept the management offer or opt for a trade sale.

‘At one stage, I thought I had completely lost the deal, and I went on holiday to the Seychelles. While there, I checked my email to find one of the executives telling me the deal could be back on. So I had to find a flight out of the Seychelles the next day.’

Mike Norfield, the chief executive of telecommunications outfit Team Telecom, led a £32.8 million MBO of the division from the publicly listed Spice Group last year (Spice has since been acquired by a private equity firm). He reasons that the key to executing a successful MBO is to lead the deal from the very beginning.

‘I’m not saying you should do anything untoward,’ he says, ‘but I definitely think it’s worthwhile trying to warm private equity firms up to the notion of a deal
in advance.

‘When you do a beauty parade with the PE firms, they do all sound fantastic and tell you how wonderful it is to be in their tent and so on. If you do it through the beauty parade, you are almost doing it on face value when really you want to get to know the people first.’

Don’t be shy

As for the delicate matter of approaching the board, Norfield expressed his interest to Spice two years ahead of the actual transaction, saying that he felt the parent group was heading in a different direction to the division that became Team Telecom.

‘When doing an MBO from a public company, you need to get a handle on whether it is viable. If it is then you must make it clear to the board or a couple of key members that you’re interested. You don’t want the business to be sold from under you.’

The principle holds equally true for private companies. David Rabson was the sales director at IT services provider ADA Technology when he approached the three owners to suggest the possibility of a buy-out.

‘Even though they had control, I was the most important personal asset for the business; I was already part of the DNA of the company but I didn’t have any stock.’

Eventually, the vendors accepted Rabson’s point and he bought them out, retiring two immediately and keeping the third on for a period as FD to retain some cultural continuity in the business.

The deal took 18 months to pull off and Rabson had to show his mettle, particularly when it became apparent that a trade sale was under consideration. ‘No-one would have paid the sort of money they wanted if on day one I said, “I don’t like that deal, I’m off,”’ he comments.

It’s a common refrain among CEOs who have led buy-outs. If the owners are weighing up other options and you’re confident about what you bring to the table, there’s no harm in reminding the owners where the intellectual capital of the business lies.

Macnair comments, ‘They did look down the trade sale route, but unless senior management came with that it wouldn’t have been a viable option.’

Moving money

Once a price has been agreed upon, there comes the trauma of securing financial support.

Rabson says that when he led the buy-out of ADA Technology, the company had sales of approximately £6 million and it was therefore too small for him to bring in third-party backers without losing a significant stake in the business.

‘I would just be moving from one set of shareholders to another,’ he observes, adding that he used a debt line from a bank, invoice discounting and loan notes to take over the company. ‘I personally guaranteed it with everything that I had,’ he says.

It’s crucial to fight your corner and retain a meaningful stake in the company. Moreover, if a PE firm is hunting for too large a chunk of your business, don’t rule out the possibility of some debt finance.

According to Ian Sale, managing director at Lloyds Bank Corporate Markets Acquisition Finance, the appetite is there to make transactions happen.

‘In this market, good businesses with talented management teams will not have a problem obtaining air time with banks and getting deals away,’ he claims.

In terms of multiples, Sale suggests that a well-run company that is able to demonstrate at least two years of growth and solid forward earnings may be able to borrow up to three times its annual profits.

Of course, given the battle-weary state of the UK economy, companies may still struggle to demonstrate sufficient robustness to a bank based on recent financial performance.

On the same page

Realistically, some form of private equity backing will be needed to fill the gap between what management and the banks can put up for the deal.

Simon Speers, the managing director of Bottlegreen Drinks, describes private equity as a ‘necessary evil’. While he is ultimately complimentary about the firm that helped back the £10 million MBO he led in 2007, he says that there was a rocky period as the drinks industry has certain quirks that escaped his backers initially.

‘They understood brands but they didn’t quite get the soft drinks sector,’ says Speers.

‘We had two consecutive terrible summers, and at each board meeting I had to explain that soft drinks sell more when the sun is shining. I’d tell them this and they would say, “OK, but why aren’t you hitting your numbers?” We’d reply, “Have you been outside lately?”

‘We were ahead of the market and our plan, but no soft drink company would have been on budget for those years. Eventually, [the firm understood] that no sunshine made a big difference. We made up.’

Other shareholders need to be chosen with equal care. David Leyshon, the managing director of CBSbutler, an engineering recruitment company, says that he was too ‘short-term’ when accepting shareholders in the business as he led its MBO.

‘You need to consider who will be important for the organisation. Having given the equity out, you can’t get it back.

‘You are better off to limit the shareholding and the issue and then see who comes through as key figures for the company. We were a bit naïve in that we gave quite a lot of shareholding to individuals who didn’t really step up – therefore we had some problems later on.’

Advisers are essential when steering a course through what is often complicated, uncharted territory.

Norfield says the one mistake he made during his MBO was to allow his adviser to also operate for the parent company. ‘[The firm] claimed they would have two senior partners each managing us separately, but that led to some confusion and argument towards the end. You need to keep your independent advisers independent,’ he states.

Cost control

The rule of thumb is to manage advisers carefully, as otherwise costs can spiral out of control.

Norfield continues: ‘Advisers do a lot for free for PE firms on the understanding that when a deal comes along there is a meaty fee that takes into account that previous work.

‘It’s the management team that ends up paying for that, and it adds to your debt – the fees are always much higher than you expect them to be.’

For the CEOs speaking to Business XL, the timeline for pulling off a deal ranged from six months to two whole years.

The long hours, turmoil and stress cannot be underestimated but, once the transaction has been finalised, there comes the small matter of running the company and proving to yourself and your backers that you can deliver on those best-laid plans to make the business better.

While some can find that transition to the hotseat daunting, others have no hesitations or self-doubt.

‘I was a natural leader in waiting and the key people in the business were following me 18 months before the deal was done anyway,’ comments ADA’s Rabson who, since the buy-out, has more than doubled sales to £15 million and tripled pre-tax profits to £1.5 million. ‘We executed the plan.’

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...