What are the basics of a buyout and who has been putting them into practice? Read on....
BUYER, BE AWARE
What is the key to getting a management buyout away? Anthony Harrington asks the basics and then reports on the buyout experiences of several Midlands companies Now is certainly a good time for management in mid-sized businesses to consider the possibility of a management buyout (MBO) - provided, of course, their company meets some strict criteria and the existing owners are willing to sell.
Jon Adams, Lloyds TSB commercial finance regional director in Birmingham, points out that existing management have a key advantage over all the competition. "With an MBO, the company is sold to the team that already knows the business well. It is a great way of ensuring continuity to the employees, the customers and to suppliers," he comments.
It is often possible for an MBO team to structure a buyout that needs very little equity funding, leaving the existing management in full or near full control of the company. Over the last couple of years, Adams points out, it is his experience that there is often no need for outside equity, other than, perhaps, a small capital injection from the management team. "The transaction is often solely funded by the bank, allowing the management team to keep 100 per cent of the equity rather than forcing them to give away equity."
Steve Simpson, associate director for the East Midlands for the Royal Bank of Scotland's corporate and structured finance team, points out that attractive as the rewards might be, the decision to opt for a buyout is not an easy one for management to make. There are a number of factors for business owners to consider.
"What, for example, is the real reason for the owners exiting? Is there a management team in place that has the requisite skills to continue the running of the business in a seamless manner? Also, when is the exit to take place? Business owners need to plan this exit well in advance; it is not unusual for 12 to 24 months to elapse between the commencement and completion of an exit.
"With such a long lifespan it is important that advisers are appointed early to guide the owners through the process.
"There are a number of key aspects of the business that need to be examined when considering an MBO. The team must ensure that the business has stable profits and cash flow requirements. Evidence of investment in the business must be considered; a management team must satisfy itself that when it purchases a business there is not an additional requirement to fund excessive capital expenditure. Some might see it as a simple rule, but the management team should not overpay and highly gear itself and its cashflow.
"As well as immediate cash considerations, a new management team should also investigate the exact ownership of key supplier and vendor relationships. It is vital to smooth running that there are no problems after the sale of the business.
"Finally, it is important that any management team goes into a deal understanding exactly how it will exit the business and realise the value of its investment."
Adrian Willetts, a director at the private equity house Bridgepoint, warns that the buyout market is still somewhat fragile. But he too stresses that now is a great time for a buy-in. "There is plenty of appetite in the market right now to fund deals, but you need to be a good business, with a good management team," he comments.
Gary Davison, regional managing director with Enterprise Finance Europe in Birmingham, adds: "Continuing on from trends through 2003, we expect asset-based lending to continue to feature strongly as part of the funding mix in supporting buy-in/buyout transactions. The increased numbers of AlIM flotations and initial public offerings (IPOs) in the first quarter of 2004 lends weight to our optimism here.
"With public valuations low and capital markets remaining flat, plcs remain under constant pressure from the City to increase liquidity. So plc non-core divestments will continue to feature and provide a willing buying market in terms of management teams, funders or trade purchasers. "There is a definite air of optimism about. Maintaining the activity and transaction momentum built up in the first quarter will definitely help people to see that the market has turned at last."
For the fuller picture,