What makes a good management buyout?

06 December 2018

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 attractive to funders. 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 and size of the business.  On larger deals the involvement of an experienced non-executive director with industry experience will add real credibility to an MBO team and funders can often introduce such people to the existing management 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 new company (“newco) that has been set up to facilitate the MBO.

Unique Selling Points (USPs)

There may be unique selling points associated with a company that make it attractive and/or niche, thus giving it a commercial edge over other players in the market.  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 the 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.  MBOs in sectors that are perceived to be riskier, such as information technology, may also be more difficult to fund, but essentially it will depend on the particular circumstances of each case.

Non-core subsidiary

Companies that no longer fit within the existing core activities of their larger group are always strong candidates for an 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 commercially 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, particularly for equity investors, who will also be keen to understand how their own future exit from the business will occur.  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 attractive as an MBO target. 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, and this is where we can help at the outset.

So if you’re looking for high quality, independent M&A advice from the leading SME deal team in the region, then contact a member of our multi award-winning team today to arrange an initial, no-obligation introductory meeting.

Contact us

If you would like to discuss how we can support you on a business acquisition, then get in touch to arrange a free no-obligation initial meeting with our multi award-winning team. For further information please call 01908 662255 or e-mail: mhcfinfo@mhllp.co.uk