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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.
If you find this newsletter helpful please forward it onto
your colleagues. If this topic triggers a thought why not ping me an
email!
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:
1. 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.
2. Funding assessment
- Review of the
business to understand the potential funding sources including term loans,
lease finance, invoice discounting, overdrafts and also vendor finance.
3. 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).
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
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
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