Lessons from those
that have done it
By Peter Brooks
Successfully completing a management buyout (MBO) in the current economic environment
can be tricky. In this article, Peter Brooks, Managing Director at LDC, explains the critical
areas to which management teams must pay attention for an MBO to succeed. Criticaleye
also asked Martin Balaam, Geoff Quinn, Jon Slatkin, Mike Norfield, Mark Hunter
and Bob Emmins, all of whom have gone through MBOs, for their thoughts.
The news that Paperchase completed The reasons for undertaking a management seller’s organisation, they are also privy to
a £30 million MBO from the Borders buyout can vary from trying to escape information that outside acquirers would
Group in the US may be an indicator a divestiture by the parent company, to not typically have access to (especially
that the flagging buyout market is at last save jobs or to maximise the financial if the company is private). There is also
picking up. According to data from the benefits management receives. However, a real concern that management may
Centre for Management Buyout Research they are a risky proposition not only for (subtly) try to manipulate stock prices
(CMBOR), the first half of 2010 saw more the financial backers of the management downward to obtain a cheaper buying
buyouts than all of 2009, with figures team, but also for the sellers. An MBO price. The perceived conflict of interest
reaching £8.1 billion (by August 2010) is different from other sales as the of a team that, as management, wants
compared to £5.6 billion for 2009. management team not only works for the the highest stock price possible for the
shareholder but, as a buyer, wants the Financing
lowest, suggests that there should be
controls in place if management stands There are those that tend to shy away from
to make a large profit from the sale. private equity or venture capital, as there
is a misnomer that private equity funds will
The current economic environment come in and start running the business.
is making it more challenging for However, the right PE or VC financers can
management teams to obtain financing help the management team enormously.
and to complete purchases. According to Look at many financers and understand their
Robin Johnson, Partner at Eversheds, intentions - this will help with choosing the
whilst MBOs have picked up in 2010 and right partners. Getting a blend of financing
are more on the agenda, trade sales are still is important, not least so that you don’t
more likely to happen. “It will be at least end up with all of your eggs in one basket.
two years before MBOs become a more
viable option,” he says. “Sellers are more Mike Norfield, Chief Executive of Team
comfortable with trade buyers as they have Telecom Group, says: “The key to the success
more certainty than management buyers.” of an MBO is ensuring you have the right
partners – private equity and banks – who
Martin Balaam, MD of BT Engage IT, gives
the following advice, “If the current owners
are putting the business up for sale and
you will be in competition with others,
think very hard as to whether you want to ... ensure that you get an exit
do this, as a trade buyer with cash usually
wins over an MBO team trying to raise
debt. In this situation, ensure that you get
package sorted out and a bonus
an exit package sorted out and a bonus
for helping to sell the company at the
highest price - you may end up with lots
for helping to sell the company
of late nights, no company and no job.”
at the highest price - you may
Jon Slatkin, former CEO of Titan Outdoor,
nearly completed an MBO in early 2010,
but the bid was thwarted by a trade buyer
end up with lots of late nights,
at the eleventh hour. “Understand who
you are competing against,” he says. no company and no job
“A company that operates in the same
industry will be looking at purchasing
as well and can operate at less cost, as
much of the infrastructure is already in you will be able to work with not just on the them for five years or longer, so form a
place. It is important to remember that current deal, but also in the longer term. judgement that best fits your own targets
the seller will want to maximise the sale It’s easy to get caught up in the here and before proceeding. Then make sure
price and won’t favour management.” now of a contract but, for the growth of your that the right PE Investor Director, with
company, it is vital that all partners share the most appropriate sector knowledge
Preparing for purchase your strategy and goals for the future. and skill base, joins your board.”
When looking to do a buyout, it is “In the case of Team Telecom Group we Based on my career in private equity, as both
important to understand the business operate with a ‘buy and build’ approach, sponsor and as a member of management
you are attempting to buy. “Totally so it was all about securing the investment teams, and following discussions with
understand the business, every part of it,” for growth and ensuring our partners were management teams that I have worked
says Geoff Quinn, Chief Executive Officer in full agreement with the direction our with, I would identify a number of
at TM Lewin & Sons Ltd. “Be completely operations are taking. I would also advise critical areas for an MBO to succeed:
honest about the business because ensuring all of your terms are in line with the
everything will come out in the long run.” agreed strategy and that your future terms Ensure that the partnership between
are not adversely affected for management management and the private equity
Undergoing a management buyout is when you do use any facility agreed.” sponsor is the correct one.
a fundamental change for a business Management and PE should spend time
and management team, and can be a Mark Hunter, Chief Executive Officer of getting to know each other and develop a
stressful and challenging task, particularly Airclaims Ltd says, “Make sure that you give close understanding of the others’ objectives
if it is the first time that management yourself a choice of several PE providers and approach. Management should consider
has undergone such a process. It is at the outset and think through very early sector expertise and contacts of PE providers
imperative that the key elements of the on what you are looking to achieve out of but above all look at deal deliverability,
buyout are put in place correctly and at a deal for your MBO team. Work closely value-adding capability and personality.
the first attempt, otherwise the effects with PE bidders to understand their aims At LDC, getting to know management is a
on the business can be catastrophic. and culture. You may have to work with key part of the diligence we perform. From
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