Laurence Whitehead, current Insider M&A dealmaker of the year and managing director of locally based MHA MacIntyre Hudson Corporate Finance, looks at the key criteria A question we are frequently asked by management teams considering a management buyout (MBO) is whether the company that they manage is an ideal target for a MBO. There are no hard and fast rules but certain factors do tend to be common.
Laurence Whitehead, current Insider M&A dealmaker of the year and managing director of locally based MHA MacIntyre Hudson Corporate Finance, looks at the key criteria A question we are frequently asked by management teams considering a management buyout (MBO) is whether the company that they manage is an ideal target for a MBO. There are no hard and fast rules but certain factors do tend to be common. Outlined below are some of the issues that will help identify if the company you manage is ripe for a MBO. Strength of management A strong, commercial and experienced management team is essential to ensure the transaction is funded. It is important to have a full team that cover all of the functions of the business at a senior level. Members of the team may have dual roles depending on the dynamics. On larger deals the involvement of an experienced non-executive director with industry experience will add real credibility to a MBO team. Strong cash flow Cash generative businesses are always better placed to achieve a successful buyout. Strong cash flow will enable the repayment of debt and interest in the geared company set up to facilitate the MBO. USPs (Unique Selling Points) There may be unique selling points associated with a company that make it attractive. For example, it may demonstrate a competitive advantage which gives rise to cost advantages or product differentiation. In this situation the company’s strong position may make a MBO an attractive proposition. Sector Companies in stable, strong growth sectors are favoured over more mature sectors. If there is excessive competition or over capacity in the sector in which the company operates, this may potentially make it more difficult to obtain funding for a MBO. MBOs in sectors that are perceived to be more risky, such as information technology, may also be more difficult to fund. Non-core subsidiary Companies that no longer fit within the existing core activities of their group are always strong candidates for a MBO. Willing vendors looking to divest of such companies will usually offer incumbent management a chance to complete a buyout unless they perceive that a trade sale would be more beneficial. Growth prospects Companies with good growth prospects are more likely to be attractive to funders. Visibility of future performance and strong expected returns are key to getting MBO transactions funded. Retiring senior management and succession issues The impending retirement of a majority shareholder can often act as a catalyst for a management buyout, especially where there is no natural family succession in place. This in itself would not make for a successful MBO but, combined with some of the other factors above, could help trigger a MBO deal. Exit route From the very outset, careful consideration needs to be given to the proposed exit route for the MBO team and its investors. A well planned exit plan will make the MBO a far more viable proposition for investors, who are also looking for their own exit. The main exit routes remain a trade sale, a secondary buyout or a float on AIM or the main LSE. Conclusions It is important for management teams to clearly identify what factors make the company they manage suitable for a MBO. Seeking professional advice early can assist in this process by helping to identify quickly whether a MBO is the correct route upon which to embark. If you’re looking for good quality, independent M&A advice from the leading deal team in the region, then contact Laurence or a member of our award-winning team today.