THE CORPORATE FINANCE NETWORK
Management buyouts (MBO) seem to have fallen out of favour. You just need to look at the recent Experian Corpin figures to see that there have been huge reductions in recent years. From 2005 to 2011 the number of businesses involved in MBOs has halved from 403 to 217. The figure for businesses with a turnover of less than £10m has dropped by a third, from 76 to just 50. This is a great shame, especially for small and medium-sized businesses, as MBOs are often the best solution for a business owner wishing to sell.
As the availability of trade and institutional purchasers continues to decline, many entrepreneurs are resorting to winding the business up when they wish to exit. If an MBO were completed instead, it would usually ensure the staff remained employed, and the brand continued through another generation. After spending many years building up both a company and a brand, these outcomes are often key aims for the departing entrepreneur, who would rather not see his life’s work dissolve.
One of the main reasons that MBOs are becoming rare among small businesses is that access to suitable personal and corporate finance is now heavily restricted for such a perceived high-risk transaction. Lenders, as well as management teams, aren’t willing to take such a risk in a depressed and difficult trading climate.
Preparation is key. Simple things such as communication are vital. I have witnessed large numbers of MBOs fall apart before they’ve even begun because of a lack of communication. The key to a successful MBO lies in the way this is handled between the management team and the business owner.
There is a tricky balance to be attained in these deal situations as “the boss” suddenly becomes an equal on the other side of a negotiation. The initial approach to the potential MBO team is a critical moment which sets a precedent for the rest of the deal.
I recall many disastrous cases where the business owner didn’t handle that first conversation well at all and often ended up losing some of his key staff to competitors. Particularly in small businesses, the team aren’t likely be experienced in the process of a transaction, so the first stage should be to educate them and explain what possibilities are open to them. This tends to be more productive if it is done many years in advance of any potential sale, and by a third party, usually the auditor or corporate finance accountant. Those deals that do successfully complete are most likely to be supported by the personal resources of the management team and their family. Or extra financial support from another individual who joins the team, resulting in a BIMBO, a combination of an MBO and a management buy-in (MBI).
Alternatively, businesses may structure a deal with the vendor for a large proportion of deferred consideration. The availability of finance from either an MBI candidate and/or the vendor himself, (via a deal structure using deferred consideration), means that the MBO team are less reliant on bank or institutional lending. And in these tricky times for raising finance, that can only be a good thing. Deals financed this way are more likely to result in successful MBOs and a capital sum for the departing entrepreneur.
These are all viable alternatives to consider for the management team or the vendor looking for a suitable purchaser for his business. Selling your business is an important decision, affecting your product, your staff and potentially your reputation. It is important to scrutinise what options are available. In this current climate, MBOs may well be the better option; certainly, they should not be ignored in the way that they currently seem to be.