Management Buy-Outs | A particular specialisation

def: Management Buy-Out (“MBO”) – when a business is sold to some or all of the existing management team.

The chance to carry out an MBO is often a “once in a lifetime” opportunity for a management team to make substantial amounts of money for themselves. The skill is to recognise the opportunity before it becomes widely apparent and retain a specialist adviser from the outset so as to be in a strong position to negotiate acquisition terms and the funding package. The opportunity may arise when:

• a part of a group or company is no longer seen as a core activity in the owner's future strategy;
• a group or company is in financial difficulties and needs to sell a division to raise cash; 
• after a period of owning an investment, a financial backer needs to re-invest in other assets; or
• in a family business, the owner plans full or partial retirement.

Corbett Keeling guides the MBO team from initial discussions with the current owner(s) of the business through to completion. The firm works closely with clients including:

• helping them decide whether the target business is suitable for an MBO and the value to put on it;
• advising on developing the business plan and forming the management team;
• recommending suitable forms of funding;
• introducing the MBO team to funders and securing finance;
• advising on acquisition tactics and assisting in negotiations with the vendor(s);
• project managing the transaction - liaising with all specialist advisers involved and so leaving the MBO team as free as possible to concentrate on running the business; and
• assisting, in conjunction with the MBO team's lawyers, with closure of the transaction.

Vital to the success of any buy-out is obtaining the very best access to funders. Therefore, keeping in close contact with providers of equity and debt finance is a key part of Corbett Keeling's activities. The firm devotes considerable resource to building and maintaining relationships with equity and debt providers, visiting them and maintaining a dialogue with them. It has also, for example, developed a proprietary database for keeping track of their investing preferences and has a partnering relationship with unquote, a leading trade journal in the private equity market, which publishes statistics on investments made in the United Kingdom - Corbett Keeling writes a regular review of private equity activity on behalf of unquote. As a result, Corbett Keeling can readily identify and secure appropriate funds for its clients. The following is just a small selection of the funds it knows:

Corbett Keeling has the ability and experience to help management teams of companies with attractive prospects raise the funds they need for their MBO. Corbett Keeling’s expertise and contacts:

• improve the MBO team's prospects of raising finance;
• increase the speed with which funds are raised and minimise the disruption to the MBO team's business; and
• result in finance being raised on better terms.

Corbett Keeling talks your language: with the firm’s operational expertise (its associates have had operational roles in a wide cross-section of businesses as well as corporate finance), we will be able to guide you through the MBO process in language you understand. We talk the talk, as well as walk the walk with you.

Contact us for a confidential, free first meeting to discuss your situation.

 

The steps in a buy-out

For futher information on the detailed steps in a buy-out, read on:

Preparation

Preparation is key. The first step in an MBO is to analyse and evaluate the opportunity that is to be presented to investors. In this way, a decision can be made as to whether funds can be raised and, if so, how much is required, the funding structure and the best source of the funds. The investment proposition, including the business plan and all associated documentation and presentations, can then be adjusted so that they are put forward to the chosen investor group in the best possible light.

Forming the management team

A key aspect of preparation is to ensure the management buy-out team is as strong as possible. The stronger and more complete the team, the more interesting the funding proposition will be. The MBO team may, even at this stage, include suitable non-executives alongside a full complement of executive directors – in order to make the overall proposal as attractive as possible to funders.

Finding the right type of investor

A crucial aspect of any MBO is the proportion of the business that is subsequently owned by each of the funding parties – be they the management team or their backers. Different backers will require management to give up different amounts – the actual amount depending on how attractive they find the business proposition and the return they are seeking. Certain investors have preferences as to the sector and stage of development of prospective investee businesses and almost all have upper and lower limits on the amounts they may invest. Some prefer to invest alongside other parties while others prefer to invest alone. Finding the right type of investors – be they providers of equity or debt – is vital.

Making introductions to investors

An important feature of the service provided by Corbett Keeling is to direct its clients towards those sources of funds that are most likely to find their proposals attractive – and then to raise funds from them on the best possible terms. Relevant sources of funds range from equity to debt and the best investor in any given situation may be:

• a single private equity fund;
• a syndicate of equity providers;
• mezzanine funds – where the risk/return sought is pitched between equity and debt;
• debt providers, whether the debt is to be secured primarily on the cash flow of the business or on its property and current assets;  and/or
• any combination of the above.

Negotiating, managing and closing the deal with investors

Having prepared the case, decided on the investor type and made introductions to selected investors, Corbett Keeling helps its client choose and negotiate with one or more preferred sources of funds. It has an in-depth understanding of funding structures and advises its clients on the most appropriate split of debt and equity and the returns that each source of funds will expect. In this way, the management team obtains funding on the best possible terms.

Negotiating with the vendor

Of course, securing funds is only half the story. The management team is involved in a "chicken and egg" situation, as it also has to agree terms with the vendor. While funders may not want to put time into an MBO until the vendor has agreed terms, the vendor may not take management seriously if approached before they have backing. During this part of the process, the management team must also keep a close eye on their responsibilities as directors of the business being sold and their obligations of confidentiality. Corbett Keeling is highly experienced in dealing with these situations – advising management on how to make their way to agreeing a deal with both funders and vendors at the same time.

Overall deal co-ordination and completion

It is essential that the management team keeps its eye on running their business and is not too distracted by the very time-consuming process of the MBO. Corbett Keeling takes much of the burden of running this process off management's shoulders, including co-ordinating the other professional advisers – tax, legal, due diligence etc – required for the transaction and dealing with vendors and funders. Corbett Keeling is its client’s key sounding board and source of advice right up to completion of the transaction and transfer of funds from the MBO team's backers to the vendor.

The Grand National

At Corbett Keeling, we sometimes say that doing an MBO is like riding a horse in the Grand National. Every time management gets over a hurdle (be that agreeing funding, reaching a deal with the vendor, arranging due diligence etc), it feels like they are in the clear – only to find there is yet another fence to be jumped. But don't despair, the end does eventually come and, in this race, there are many winners!