|
A management buyout could be the real deal
The UK management buyout market has surged by 27pc in value to a record ÂŁ25billion over the past 12 months and conditions are set for another year of strong investment activity, according to research by KPMG, the professional services firm.
In a generally buoyant period for all types of corporate deals, KPMG says bank debt is readily available and private equity groups are flush with record amounts of capital. All of which indicates, says KPMG, that it’s a good time for owners who want to sell up or for management teams who want to take their companies on to the next growth level with new funds.
Encouraging though the headline numbers may be, selling up is never easy for mid-market companies, whether it’s to the management or a trade buyer. A study by the Centre for Management Buyout Research shows that while the buyout market reached a five-year high in 2005, it was driven by “the growth of the mega-deal”.
By contrast, MBOs involving companies worth between £10m and £250m actually fell by 23pc to £7.4billion, which suggests that private equity firms and their money are not easily parted. “They will probably have a more rigorous due diligence process than a trade buyer because that’s their stock in trade,” says David Molian, codirector of the business growth and development programme at Cranfield School of Management.
Indeed a sale becomes an endurance test for all concerned and can often take up to two years to complete. “It always takes longer than you think and probably costs more than you think,” he says. “The vast majority of companies at the start of the process have no idea how time-consuming and demanding it’s going to be. That’s the single biggest shock.” At the outset, says Mr Molian, a company must establish which director takes on the “full-time job” of managing the sale process and who is going to continue running the business on a daily basis. This is especially important in an MBO, when potential conflicts of interest can arise.
There also needs to be clear communications planning, with companies taking professional advice on this as they would on any other aspect of the deal. “Everybody needs to keep the right side of company law,” says Mr Molian, “as well as ensuring
there’s the minimum of rumours flying around and uncertainty in the company which might cause key individuals to leave.” For the individuals selling the equity, they must not allow emotion to get the better of judgment. Mr Molian adds: “I’ve heard so many stories about deals where the director’s spouse gets wind of what’s going on and the pressure is overwhelming to do the deal as quickly as possible because, mentally, the proceeds have been spent. And the cunning purchaser will exploit that ruthlessly to drive the price down and get an early deal done.”
As for the management leading a buyout, the big surprise is how much money they can borrow without being wealthy, according to Directorbank, a recruiter of executive and non-executive directors for MBOs.
Directorbank has produced a guide for management teams on how to assess their chances of securing capital for a buyout. It says most financial backers expect directors to put up personal funds amounting to no more than six months’ to a year’s salary, which they can find through a second mortgage, savings or from friends and family.
The guide says that, as a first step, decide if your management team is backable - whether banks or private equity firms will lend you the money to buy the business. And decide if the company has the potential to grow more quickly; when you borrow money you change the dynamics of the business and have to pay back capital and interest. That means making more cash and profit than the business was earning before.
Directorbank says those sectors that work well for MBOs include: financial services, leisure, logistics, media, healthcare, specialist manufacturing, telecoms, and IT services. Less promising, it contends, are low-growth, loss-makers, one-product firms – even low asset base companies – or “people” businesses, although, according to Mr Molian, they are just as likely to attempt an MBO.
As he says: “If the people are the prime assets you don’t want them disenchanted, ready to walk at the earliest opportunity.”
For further information please click below:
http://www.som.cranfield.ac.uk/som/groups/enterprise/credo
http://www.telegraphbusinessclub.co.uk
|
