Now might be the perfect time for that management buyout (MBO) you’ve dreamt of, says Phil Riman, partner at White & Black Legal, a specialist in securing venture capitalist and private equity funding.
Neglected or pared down bits of a business that are still going concerns offer would-be owner-managers the opportunity to go it alone. Meanwhile businesses are looking to convert assets into capital and they will be receptive to the idea of scaling back or selling non-core operations for cash.
All of this offers great scope to management buy out teams, says Riman, who offers these tips to potential MBOs:
- Conquer your fear. Getting into bed with private investors may seem a bit daunting, but VC funding allows you to do those things that won’t necessarily make an instant return. It’s difficult to scale a business with bank funding, because you are servicing a debt even before you have started. Private investors think longer term (arguably) and will look to get their return on exit. Financial risks are part of the business plan anyway, so figure venture capital into it from the start.
- Accept that you are giving some of the business away. Sure, private investors may reap the benefit of your hard work, and yes, it’s hard to hand out a large share of your business, but it’s better to have 20 per cent of something than 100 per cent of nothing, as the old saying goes.
- Get support.The most common reason MBOs fall at the first fence is because they fail to appreciate group support. Taking a business out of a larger organisation means the support teams that helped that business, such as IT and HR. Put transitional arrangements in place and consider paying the vendor for support as the business is being moved into new ownership.
- Budget for back-office functions. Do not try to wear too many hats to save costs. It leaves the management with no time to do what they are best at and could stymie growth.
- Protect the brand. Customers will associate certain brands with the larger group. This altters even if it is the same people at the top. So try to negotiate the right to cite the former owner in the new branding package.
- Bank lending is there. Riman points out there must be a portion of banking finance for private equity investors to come on board. But, there has been a considerable freeing up of bank funding in the mid-tier level of up to £50m.
- Have a solid financial plan. Companies looking for an MBO have to conform to basic financial hygiene and demonstrate clear profitability. Foreign banks have pulled out of UK commercial finance leaving opportunities for UK banks, newly recapitalised by the taxpayer, to pick up the best prospects. This means it’s critical to look as attractive as you can to cautious investors.
(Pic: Parksy1964 cc2.0)
