Finance Matters: MBOs carry an element of risk – and reward
Matt Willmott, corporate finance associate at Francis Clark LLP, looks at the issues involved in a management buyout, arguing that with the economy starting to pick up now could be a good time to consider such a deal.
The prospect of taking the step from management to shareholder through a management buyout (MBO) is usually a once in a lifetime opportunity. Whilst the process requires careful consideration and planning, there are several common misconceptions that have prevented many managers from taking the first steps.
Management need to have significant personal wealth to fund the acquisition.
Whilst this may help reduce the risk to a potential funder, the most important factor from a funder's point of view is management's commitment to the deal and the future of the business.
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There are many specialist funders that will provide the bulk of the funds (both debt and equity) whilst potentially allowing management to maintain a controlling interest after the deal.
MBOs are only for very large companies in specific sectors.
We are seeing an increasing number of MBOs in the SME market place within the full range of business sizes and sectors. It has become one of the most popular forms of acquisition in the UK.
MBO teams can never compete with trade buyers.
There are many reasons and instances why this is not always the case. For example, management understand the business better than any buyer ever could, they can often move quickly and MBO teams are commonly more acceptable to the workforce, representing the minimum disruption to the business.
MBOs are risky ventures.
Often MBOs are funded by debt which creates additional debt servicing obligations. This can be considered to increase the risk of a business. However, a well-structured MBO can mitigate this potential impact.
Management will require a clear and well thought-through business plan to present to funders and therefore an understanding of the future financials (and any potential shortfalls) is essential. Analysis from equity funds show MBO to be one of the most preferred investments.
It is always useful to look at the situation from the shareholders' perspective and recognise what they want. Whilst a great opportunity for management, it could also be an appealing prospect for the vendors, particularly at the present time:
Entrepreneur's relief is currently available on the sale of shares in a business (reducing the tax charge), which could be removed under a future change of government.
Valuations are beginning to improve as signs of recovery and confidence grow.
The transaction can remain confidential, minimising disruption to the business and its employees. Disruption from a due diligence process will be minimised.
MBOs avoid a potentially aggressive trade purchaser that may opt to fundamentally change the business that the owner has spent years developing.
The 2013 WMN deals review shows South West MBOs fell from 40 (representing 11% of total deals) in 2008 to only 8 (representing 3% of total deals) last year which is largely a result of continuing economic uncertainty.
As the UK begins to show signs of recovery and finance is widely available, it may be the right time to act.
Having the initial conversation with the shareholder(s) can often be the hardest step. There may be a unique opportunity for both parties to achieve their goals but if neither party is willing to make the first move, it could easily be missed.
This is where experienced independent advisors can be invaluable in brokering a deliverable deal.
For further information contact Matt Willmott, corporate finance associate at Francis Clark LLP. Telephone Matt on 01392 667000. Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. More information is available online here
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