Dear Business Owner,
Welcome to the April issue of Game Plans for Growth, the newsletter for business Owners and Managers. This month we look at what is a typical Management Buy Out (MBO) and how could it be helpful to you as a business Owner or Manager.
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A Management Buy Out (MBO) is simply the acquisition of a business by its existing management team, usually backed by external funding sources and so effectively funded by the business itself.
For the business Owner an MBO could prove to be the answer to a succession planning issue, at the same time enabling a rewarding phased exit. For the business Owner an MBO does represent a ‘known quantity’ and it may be much easier to build the necessary trust and rapport needed to ensure that the deal actually happens. Any necessary warranties and indemnities should also be much more restricted than with an external purchaser.
For business Managers this could represent their one key opportunity of owning their own business and so enabling them to put all their thoughts and energy into a business strategy where they will benefit from capital growth. In addition MBOs are favoured by banks and PE funds as they are perceived as lower risk investments; this often means that business Managers could achieve funding in an MBO well in excess of that available in a green field start up situation.
For business Owners and Managers alike it will certainly pay to have a good understanding of what is involved before contemplating this strategic move.
Most successful MBOs will follow a similar procedure which should involve the following steps:
- Management Team – Evaluation of the strengths and weaknesses to determine whether the team is strong enough to lead the business and to win external backing. Any management gaps need to be filled or a strategy to fill them agreed.
- Funding assessment – Review of the business to understand the potential funding sources including term loans, lease finance, invoice discounting, overdrafts and also vendor finance.
- Heads of Terms – Negotiation of the Heads of Terms between the lead manager (MD to be) and the business Owner; this should include all major issues or contentious areas. It is much better to agree all key issues when only 2 main parties are involved than well into the deal when there may be between 4 and 6 parties negotiating (including each side’s lawyers).
- Business Plan – the MBO team will prepare a narrative and financial business plan which needs to professionally put across the case for external funding. For tips on preparing professional business plans click here.
- Scope Legal work – draw up the scope for legal work required. This involves determining which legal agreements are needed and what protection is needed for the existing Owners and for the new Manager Shareholders.
- Tender Legal work – the Owners and MBO team should then tender the legal work to selected Corporate Lawyers who have good experience of doing deals; a poor choice of lawyer acting for either party can wreck your deal.
- Due Diligence – the MBO team will want to conduct due diligence, particularly into aspects of the business that they have not exposure to before; however the level of due diligence is likely to be very much less extensive than if an external purchaser was conducting this.
- Warranties & indemnities – the MBO team will need to carefully consider what warranties and indemnities it requires, although clearly these should be substantially less than with an external purchaser.
- Working Capital review – The MBO Directors need to be comfortable with the working capital to ensure that the new business will have adequate funds to meet anticipated cash requirements.
- Bank Tender – the MBO team will wish to secure bank funds to either supplement PE funds or to provide for all cash requirements. A professionally run bank tender will achieve the best facility and terms for the MBO business.
- Beating Budget – it is essential that that the Owners and MBO team remain focussed on the ongoing business and that they continue to meet all published Budgets and forecasts. MBO teams which use a part time FD to help project manage the deal process find this much easier, and this in turn improves the chance of the MBO occurring very significantly.
The End Result
Most MBOs have a very beneficial impact on the business with re-invigorated and re-motivated management. The business is also less likely to undergo a fundamental change such as might occur with an external purchaser, so the employees are more likely to be encouraged and motivated to support the business. For the business Owners, they can have the considerable satisfaction of seeing the business move on to the next generation, whilst still achieving the proper value that the business deserves.
“The addition of a part time Finance Director from vfdnet made for a cracking management team to negotiate and complete our MBO. Although the MBO process was uncertain and difficult at times, vfdnet ensured that we remained focussed on forging ahead with the business, and really helped make the deal happen. With a strong market position as a leading waterless printer, together with a highly motivated management team that owns the business we now look forward to the future with confidence.”
Gareth Dinnage – Managing Director of Seacourt Limited – click here for the Seacourt website