Matthew Peek of Barclays: Is a management buyout right for your business?
One of the key questions on business owners’ minds is: “What does the end-game look like for me?”
There are several options, of course, which can include selling it or passing it to the next generation of the family.
Another option is to give the opportunity to those who have helped them build it – and it is this that I want to cover.
Management buyouts (MBOs) allow the management team of a company to acquire the business that they work in from the existing owner, usually with external financing support.
The management team then employs its own expertise to grow the business, improve its operations and generate a return on its investment.
Here are four stages to consider before embarking on that journey.
Identify talent within the business
In any management buyout, the quality of the management team is often the most important consideration.
The team should be competent and committed to the business with a range of different skills.
The ability of the management team to work alongside each other and be responsible for key areas of the business should be considered.
Engage with advisors
At an early stage, have discussions with advisers to undertake a feasibility review and develop details around the deal including likely finance options, price for the deal and assess the strength of the management team.
Advisers will be able to provide assistance with valuing the business, preparing a business plan, identifying finance options and tax and legal planning. It is important to give consideration to the deal structure in order to ensure that different parties are considered and the structure is viable.
There are a number of different finance options to finance an MBO. Usually members of the MBO team are required to invest personally in the deal in order to ensure their commitment to it.
However, this personal investment usually represents a small proportion of the deal size, with the bulk of the finance provided from alternative sources such as bank debt.
A variety of finance providers and structures exist. They include:
• Bank debt – Banks are willing to lend funds to provide cash flow term loans that are typically repaid over three to five years. It is important here to consider the cash generating ability of the business in order to determine how much debt the business can support.
• Asset finance – assets within the company such as property, stock or debtors can often by leveraged in order to provide a source of funds.
• Private Equity – this is generally more expensive form of finance as the equity providers require a higher rate of return for the risk that they are accepting through the deal.
• Vendor loan notes – this is often used to cover the shortfall between the purchase price and the amount of finance raised from all other sources. A proportion of consideration is left within the company as loan notes to be repaid over time.
Quality legal advice
Often a new company is set up that is owned by the MBO team. Legal advisers will support with this process including the writing of governing documents, service agreements with directors and a sale and purchasing agreement to cover the acquisition of the MBO target business.