Traditionally, there are three principal routes open to founders looking to exit their business: sale to a trade buyer, an IPO or sale to a management team, often backed by a private equity (PE) firm in the form of an MBO. The sluggish global economic and business environment have meant that market conditions remain sub-optimal for IPOs. The opportunity to undertake an MBO is still popular and being pursued by founders and management teams alike.
MBOs continue to be popular across major markets. In recent years, in the UK there has been double-digit growth in MBOs completed and, despite a slight dip last year, more settled economic conditions are likely to lead to an uptick in deal flow. The technology and manufacturing sectors have been vying for the top spot in recent years. The former, with its dynamism and faster-paced growth, likely to vie for the top spot again in 2020.
At Maven Capital Partners we have backed over 30 MBOs in the past 10 years and continue to see a range of promising opportunities across the UK. In Dec 2018 we held a final close at £100m for our maiden MBO fund, the Maven UK Regional Buyout fund, to cater to this growing opportunity. Our nationwide team has significant experience of working with high-growth SMEs and completing buyouts. We therefore have an in-depth understanding of what are the best options. Indeed, Maven was itself the product of an MBO. I’ve outlined below the areas I would recommend management teams focus on if they are considering an MBO.
Understanding whether an MBO is right for you and ensuring that you have the right advice
First, management teams need to really consider whether an MBO is right for them and the business. This might seem an obvious point, but many management teams do not give this enough thought. It is a big transition from being an employee, admittedly at a senior level, to being a business owner.
To help arrive at the right decision, it’s of course worth getting high quality advice from experienced professionals who understand the challenges and requirements of doing an MBO. There are two areas in particular which I always suggest clients should begin by asking themselves: “can you secure the right funding for your business?” and “can you get the right valuation?”.
Securing the right funding is key
When it comes to securing the right funding, it’s important to remember that there are numerous sources of financing available to support an MBO. This includes PE investors, banks, subordinated debt providers, and vendor financing. Each of these options entails different costs, requirements and potential benefits. It is important to choose wisely and, in particular, to consider how much outside involvement you want a funding partner to have in your business going forward.
For example, if you simply take on a bank loan, then you can expect to not have too much input from your local branch and bank manager. You will rely on existing expertise within the management team, perhaps learning ‘on the move’ as you try to manage the intensive transition into an independent business.
However, if you work with a PE house, then they are likely to play a closer and more supportive role as they will be a shareholder in the business along with the management team. This helps to ensure there is alignment of interest for all parties from the start. Indeed, in addition to one of their own experienced executives joining your Board, they might also be able to introduce and appoint a Non-Executive Director and/or Chairman. These will typically have a wide range of skills and experience in helping to grow businesses and may also have specific knowledge relevant to your sector.
This reflects the fact that PE investment tends to be more patient than other sources of funding. PE houses remain invested for typically between three and five years in order to help your business accelerate its growth. Moreover, PE houses may also be able to provide additional follow-on investment to the business as it scales, whether to support a buy and build strategy or to help in internationalising the business as it develops new markets.
… as is setting the right valuation
When it comes to setting a realistic valuation for your company, I would also strongly urge management teams to get proper outside advice. Because the bottom line is that a buy-out is an acquisition, and the seller is often the original founder of the business. Therefore, having an external adviser can help take some of the emotion out of sales negotiations, and achieve a fair valuation for all parties. Crucially, outside advisers can also help to project manage the transaction. This ensures that the management team is able to continue to focus on the day-to-day running of the business during the sales process.
Having a clear and realistic strategic plan is crucial
Few MBOs complete without some unexpected issues arising. However, typically the due diligence process should highlight such matters. My advice would be to either rectify these pre-deals or make resolving them a key element of your overall deal planning.
This isn’t just good housekeeping for the sake of it. If you want an investor to convert their initial interest into actually closing the deal, then they are going to want to see that you have your house in order and have the capability to deliver your strategic plan. Hence why working with experienced investors or backers, and getting the right advice early in the process, remains so crucial. They will have worked with a wide variety of businesses and sectors, and so will be aware of all the issues that can typically arise. They can help you to ensure that potential pitfalls are identified and dealt with early – ideally, even before the due diligence begins.
You should have a plan for your business for the 100 days post deal as evidence of your ‘investor readiness’. Indeed, PE houses will often expect to be able to refer to the ‘100-day plan’ during the due diligence process. This plan should focus on value creation and the key initiatives that need to be undertaken to increase both the profits and capital efficiency of the business. Contrary to a common misconception, this plan should not simply be about reducing operational costs. It should focus on how to grow top line revenues by developing new products or services, entering new markets and upgrading or improving systems and processes.
MBOs can help your business realise its potential
Although initially completing an MBO may seem daunting, I’ve seen many management teams achieve great success over the years by pursuing a buy-out and being able to take their businesses to the next level.
We have transacted many MBOs over the years, including four funded by Maven’s new UK Regional Buyout Fund across the niche manufacturing and healthcare recruitment sectors. I know there is still a significant amount of institutional money looking for the right investment – which could well be your business.
Maven Capital Partners UK LLP (Maven) is an independent private equity house focused on the provision of flexible equity and debt funding for UK SMEs, and one of the most active managers in the UK having invested over £470 million in British businesses since 2009.
Headquartered in Glasgow, and with other offices throughout the UK, Maven has over 90 investment and support professionals providing a truly nationwide coverage. Maven has £660million funds under management and ready to invest, and manages assets for a variety of client funds, including Venture Capital Trusts, UK regional fund mandates, and Maven Investor Partners – a syndicate of institutional, family office and experienced investors.