Partner Article

Andy Nash on successful management buyouts

2012 - Boom or bust for MBOs?

Research by Experian Corpfin released this week shows Private Equity deals gathering pace and responsible for sustaining levels of M&A in the UK in the face of substantial decline in IPOs and Rights Issues.

The research highlights strong levels of activity in the latter half of 2011 as funds looked to invest their war chests.

This means management teams have the opportunity of a lifetime to acquire “their” company at a realistic price. I’ve been closely involved in a dozen such deals over the past 20 years. Follow this set of guidelines and seize the moment.

1. Do an MBO/MBI with your eyes wide-open

The demands on you, your colleagues and your family and friends, will be severe. And this just to complete the deal. After completion, difficulties and pressures will increase. The risks are significant - even for a well-managed and successful business.

2. Ensure you are an effective team

A talented group of individuals isn’t enough. You must be a team. Any fault-lines within management will be exposed.

3. Don’t overpay (work to a realistic business plan)

There is an inevitable conflict between preparing a plan which is achievable but also capable of supporting a price high enough to ensure you can buy your company. Striking the right balance is easier said than done.

4. Choose advisors and backers you feel comfortable with

There is no shortage of accountants, lawyers, bankers and private equity houses with an appetite for a good deal. But you must feel very comfortable with them. Your respective commercial and career prospects will be in each others hands. There must be openness, trust and mutual respect.

5. Do your deal on a contingent basis

This might be obvious, but some management teams have been caught out. Ensure you are not left holding the baby if the deal fails to complete.

6. Your strategy must be capable of being understood and implemented

Warren Buffett says if a plan can’t fit on a side of A4 he can’t understand it. Given that 80% of strategy is about implementation, businesses will find it difficult to achieve their objectives without absolute clarity and understanding of strategy throughout the company.

7. Take heed of the due diligence report

You meet many managers scarred by the due diligence process. While due diligence is in many ways a fall-back in case something goes wrong for the backers, it nonetheless shines a light into every corner of your business. Your first instinct when faced with criticism may be to deny it. Make sure it isn’t you who is in denial.

8. Your board must be effective

Directors must be individually and severally effective. Non-executive directors must add value and fit in as part of the team. Prepare and adhere to an annual board calendar. Board papers should be circulated at least three working days before the meeting, and must contain information not data. Important performance indicators (e.g. cash forecasts and covenants), should be graphed. Communications between the board and fund providers must also be frequent, candid and well-managed.

9. Incentivise your important managers

Businesses are run by people. Retaining all of the potentially valuable sweet equity amongst just the top team can be divisive. Incentivise managers who are significant in the running of the business.

10. If it goes wrong: act fast and get outside help

Many MBOs/MBIs experience a drift from plan which invokes a recovery situation. Remedial action must be taken fast. If analysis indicates this is not a one-off, but a recurring problem, your survival is at stake. Recognise and act accordingly.

11. The exit: seize the moment

It’s highly unlikely there will ever be a perfect time to exit. There will always be some clouds in view: a potential loss of a contract, or significant price increases in raw materials. Carpe diem.

12. Be true to yourselves and the company

There will be several occasions where you face a moral maze. Whichever way you turn: someone stands to lose. Advice may conflict and you will receive the most passionate advocacy from parties with different objectives. Do the right thing for the business as invariably this will benefit just about everyone involved with the company.

This was posted in Bdaily's Members' News section by Tom Keighley .