Over recent years, the number of Management Buy-Outs (‘MBO’) has reduced as alternative transaction formats and the emergence of both corporate and financial acquirers have dominated the M&A market. However, the availability of finance for leveraged transactions has not wavered.
The benefits of an MBO make them a win-win-win for the vendors, the MBO team and the local economy. Sellers who are concerned with leaving a legacy are often motivated to see their ‘baby’ continue under the stewardship of people that they trust. The MBO team will cite their newfound control as a key benefit. Importantly for the economy, business ownership and jobs stay in local hands.
However, MBO’s can often be challenging environments with relatively high debt levels to service, so it is essential that the MBO Team is properly advised in terms of valuing the business and structuring a deal.
As ever, the key factors are:
- The MBO team – will they deliver? Potential backers will need convincing that the team have the prerequisite and adaptable all-round skills to lead the business post-transaction. The team should be sensible but ambitious, with a clear strategy and a desire to create their own capital gain in the future.
- A strong, cash generative company. Does the company turn profit into cash? Strong, consistent cashflows are imperative for funders who will want to be repaid quickly – usually within 3-5 years.
- The right price and structure. Funding typically comes from banks, alternative lenders and via asset finance. Increasingly the Sellers will need to act as a funder (i.e., wait for some of the consideration) to facilitate a transaction
This may all sound straightforward, however achieving an appropriate mix of these ingredients can often be a challenge. You must be prepared to shape your aspirations in order to facilitate a transaction, seeking the right professional advice.
Preparation is a must with MBOs. They may take months to complete and become a major distraction to day-to-day operations. Don’t let this happen.
It is vital to choose the right advisers who can help you to assess all options and ensure that you don’t just drift into one.
MBOs are prone to failure if feasibility and planning has not been seriously considered. Don’t leave it to chance.
Breeze Corporate Finance has considerable experience and a proven track record in advising management teams and vendors to deliver successful MBOs.