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Recipe for MBO success

Recipe for MBO success

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There is only one way to make a great deal of money; and that is in a business of your own”

So said John Paul Getty, a man who knew a thing or two about accumulating wealth. Perhaps with this in mind, more and more management teams are exploring the feasibility of a management buyout and, in many cases, successfully concluding a deal.  Taking ownership of a business, through a management buyout, has never been more popular.

Over the last 12 months, Ashcroft has enjoyed a record year for corporate finance transactions, completing management buyouts, trade sales and fundraising from £2m to over £100m.   Buyouts have formed a large part of these completions, from the Ipswich based Marshall Wolfe in January 2021, through to Cambridge’s PIR International just last month.  PIR International, a leading provider of executive search and interim services to the global life science industry, was acquired by the management team of Sally Hope, Stuart Penney and Tom Bradley from founder Carolyn Douthwaite, who founded the business in 2006.

All of these deals have three common features that are critical to a successful buyout: (i) a willing buyer and seller, both keen to find a deal that works; (ii) a robust business plan with strong growth prospects and (iii) a credible management team

Willing buyer and seller: the most important element, and an obvious one, is to have a vendor, often the founder, willing to sell at a price the MBO team and its backers can afford.  There are normally other exit options for a founder, of course, notably a potentially lucrative trade sale, but there are also advantages to a buyout (discussed below).   Without some goodwill on the part of the vendor, a deal could prove difficult.

Profitable growing company: essential for any funders, particularly equity providers. The company should ideally show some or all of the following attributes: strong cashflow, buoyant market sector, credible and exciting growth story, sustainable and increasing profits, and some clear competitive advantage.

Management team: the beating heart of the deal, a team with ambition, resolve and not a little appetite for risk.  It’s important that all key positions are filled, including managing director, finance director, operations, IT, and sales director. It is possible to bring in team members as part of the deal, but any unproven members can make funders nervous.

For the management team, the appeal and advantages are a buyout are clear, and it goes well beyond Getty’s view that it’s the only way to make some serious money.  The management team can enjoy independence and autonomy, a chance to really shape the future direction of the company and perhaps the opportunity to leave a lasting legacy.

For the vendor, whilst the price will always need to be right, there are clear advantages too: a quicker and smoother deal, fewer warranties and indemnities as the management team should rely on their own knowledge, and no need to “go to market” with all that entails and the threat to confidentiality. The fact that the management team already understands the business and is running the company on a day to-day basis means that the ‘execution risk’ of an MBO is reduced. Unexpected due diligence findings are less likely to interrupt the process. Finally, many vendors don’t want to sell to a competitor or large corporate group, preferring instead to see their legacy maintained through continued independent ownership.

The key to a successful MBO is the need for a perfect partnership between buyer and seller, target company, financial backers, and a growth story. It is important to realise, however, that there are far more MBO opportunities considered than there are completed transactions. So, one final ingredient, perhaps…. good professional advice?  For further information on management buyouts, including funding considerations and tax implications, read our guide to MBOs available at www.ashcroftllp.com or contact the team at Ashcroft.

Tom Gallop, Partner, Ashcroft. 01223 920200

Published in Business Weekly February 2022

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