Choosing the right exit route
It’s therefore a good idea for owners to help the MBO team illustrate how the private equity backer might realise their investment in a few years, as this will increase confidence in the deal and optimise the price paid now.
Another option is for a ‘vendor-initiated buyout’ to take place. This is where an owner looking to sell a business first approaches a range of equity providers to find out what funds would be available to back an MBO and, if the sums discussed constitute an agreeable purchase price, only then is the idea of a buyout raised with the management team and they are introduced to the equity lender.
Furniss says, ‘This can offer a business owner greater certainty of realising the value for the business they desire, as well as giving the MBO team a head start when it comes to securing financial backing.’
However, Iain Mackinnon, senior partner and founder of Mackinnon Corporate Finance, argues, ‘If the MBO team cannot put together a compelling business case to secure funds without the vendor’s involvement, they’re not the right people to buy and run the business.’
He continues: ‘You shouldn’t be the one getting the private equity backing for your management team to buy you out. Ask yourself this: If you’re doing all the hard work and still being the pivotal player, how have they proven they’re capable of taking the business forward successfully without you? And if they’re not competent, how likely is it that you’ll get any payments you’ve deferred in expectation that the company’s value will go up?’
Secrets and lies
A major advantage MBOs have over trade sales is increased confidentiality. Dealing with external buyers can alert the outside world to the fact the business is up for sale. Trade sales can therefore expose you to ‘fishing trips’ by competitors, who feign purchasing interest in order to gain access to trade secrets. All potential purchasers who examine your business, whether they eventually buy it or not, will walk away having looked at your crown jewels.
‘There’s a general belief that selling to an existing management team reduces the risk of information leaking to the market,’ says Luke Ahern, director of broking at smaller company specialist stockbrokers Corporate Synergy. ‘It’s understandable shareholders might feel reticent to open the company books to all and sundry and expose themselves to corporate buyers who are competitive.’
Vendors should be aware, however, that MBOs present other risks associated
with confidentiality and trust, which can be just as commercially damaging for
a business. For example, during any acquisition process, directors have ongoing responsibilities to the company and its shareholders. However, if they are also potential owners of the business, they have a vested interest in acquiring the target on the best possible terms. Divided loyalties are clearly going to be an issue. At some point during the MBO process, you’ll have to face the fact that your management team is no longer your own and has its own interests.
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Scoring big when selling up
Shrewsbury Town Football Club chairman Roland Wycherley has just been through what he calls the ‘emotional trauma’ of selling the business he’s built for 34 years. He founded The Midshires Group, based in Shrewsbury, in 1972 and it became one of the largest independently owned vending companies in the UK. It was sold for an undisclosed sum at the beginning of this year to Bunzl Plc, the international distribution and outsourcing group.
‘Every entrepreneur instinctively knows when the time is right to sell, but it’s still an emotional trauma even if you’re ready for it,’ says Wycherley.
He says his management team weren’t inclined to take on the financial burden of borrowing to buy the company, besides which, ‘two powerful players’ in the trade made offers to buy him out. ‘I chose to sell to Bunzl because I believed them to be an ethical operator that understood the business. Acquisitions are a sensible option in this industry, and organic growth is very difficult to achieve in present economic conditions. Times are tough, depsite what the Goverment says.’
He was determined to crystallise the value he’d built up in the business during three decades by securing a lump sum payment. ‘It was a cash sale done on the day â“ I didn’t want to take a stake in future earnings or shares and the like.
‘One of the best decisions I made was to get advice and expert help selling my business. I had a perceived value of its worth and I’m happy to say that Mackinnon Corporate Finance helped me receive 15 per cent more than that from the sale. It’s not always easy for business owners to trust advisers, but I’m glad I brought in expert help. I’m very pleased indeed with how it all turned out.’
And although he’s no longer running his own business, Wycherley is gainfully employed in the not exactly small project to build Shrewsbury Town’s new
£1.5 million stadium. ‘It’s keeping me busy,’ he confirms.
Additional advice
You can benefit from a wealth of free advice from entrepreneurs who’ve sold their firms, private equity providers and corporate finance experts by attending a series of free seminars at Arundel House in London.
‘Planning the Perfect Exit’ and ‘Completing the successful MBO’ are seminars organised for anyone considering how to sell their business or buy the one they manage. For more details and to register for these events, visit www.businessxl.co.uk/live