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Executing an MBO

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Executing an MBO

  1. 1. Executing an MBO 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 www.criticaleye.net 01
  2. 2. 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 www.criticaleye.net 02
  3. 3. Focus on cash, not on profits. You have to be realistic about how much cash is needed to run the company the point of view of management, the best Keep in mind long-term strategy Management team price may not be the same as the best team. and exit method at all times. Company valuation can be boosted Picking the right team to work with is vital. Focus on shareholder value and considerably when an organisation is Not only will they help run the business, rigorous financial control. well prepared for an exit and is appealing but you will be spending months with Ensure that this is at the front of all to a buying party, particularly when this them preparing for purchase and, under stakeholders’ minds at all times. Appoint is a trade buyer. A strategic fit can bring this type of stress, there is no doubt that a dynamic, commercially aware FD willing enormous intangible value, and it is easy personalities will clash and people will crack. to challenge other board members and for a company to neglect this and focus It is therefore critical that you get on! constantly looking to maximise cash on shorter term operational issues. generation and profitability, and non- “Prepare your strategy, then pick a team executives who can add considerable value Align interests. that can deliver that strategy,” says Geoff. (and are appropriately incentivised to do so). A key part of the relationship building “You need solid people at the top and those between management and sponsor is that complement the methods of the CEO.” Appoint quality advisors and ensuring that all parties have the same lawyers, but at suitable prices. aims, incentives and strategic vision. If “From a chairman’s perspective, it is Advisors’ fees are typically very high things go wrong with a private equity deal, important that the legacy of the company and they can vary in quality. Ensure that relationships can be strained and some remains intact, throughout any changes they have a close understanding of people may look to ‘walk away’ at the in financing or ownership. To do this, an the business and its needs and can be earliest possible opportunity. Clear and organisation needs a skilled executive team available and capable of adding their measureable targets with desirable rewards and strong strategy. As chairman, it is my support at key points in the negotiations. allow all key parties to desire and share in duty to help the CEO and his management For LDC, relationships with our most the glory when the business is a success. team realise ambitious growth plans as trusted advisors are central to maintaining well as challenge decisions,” says Paul our track record. Bear in mind that the A strong start is key. Mason, Chairman of Radley and Co Ltd. advisor giving you a ‘bargain’ when you It is vital for morale and relationships buy the business may not be the best within management and between Time one to appoint when looking to exit! management and private equity that the deal gets off on the right foot. The According to Robin, every MBO team he has Mark says, “Take time to find the best first year budget / forecast cannot be worked with has underestimated the time and most appropriate advisor and lawyer missed, and should be written in blood! it takes to complete the deal. “Write off at to help you through the process. Early in least three months of your life,” he says. the negotiations you will quickly develop Above all, buy at the best price you “Not only are you doing your day job, you a picture of their level of understanding can get, and don’t over-leverage! are working on the deal on top of that.” of your business and how available Over-paying for a business will make they will be to add their support when it considerably harder to get the value Although completing an MBO is negotiations start to hot up. Airclaims’ uplift you require, and excessive debt difficult and time-consuming for the management were extremely fortunate to can strain cash flows with large (and management team, “it can be very have Baker Tilly and Olswang advising.” potentially crippling) interest payments. satisfying when it is done,” says Bob. Management teams need to get proper Robin asserts that MBOs usually go wrong © Criticaleye 2010 advice up front. Appointing the right because management did not understand advisors is paramount – make sure you the cash flow needed to pay the debt. Peter Brooks hire someone that is not involved with the Bob Emmins, Finance Director at ABF Managing Director, LDC business and that can work exclusively Ingredients, who completed an MBO out of with, and for, the management team. Campbell’s, says, “Focus on cash, not on profits. You have to be realistic about how much cash is needed to run the company.” Contact Peter through www.criticaleye.net www.criticaleye.net 03

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