| The Quay Capital guide to MBOs
What are they?
An MBO is a transaction where existing management buy the business from the current owners, usually supported by private equity investors and debt financiers. An MBI is similar, but involves a new management team buying into a business in conjunction with equity investors and debt financiers.
Why pursue an MBO?
Successful MBO teams can become very wealthy, very quickly. Management generally contributes a very small amount of the initial purchase price but receive a significantly larger proportion of the equity in the business.
What’s the catch?
Whilst small in relation to the purchase price, the initial stake invested by management is likely to be large in relation to their net worth. In the event that the company experiences difficulties, much of the value of management’s stake can be destroyed.
It is also extremely important that an MBO team has good relations with their Private Equity investors. Every potential investor will be your best friend prior to the MBO, but choose the wrong partner and things can change dramatically in the event that the going gets tough.
MBO teams should ponder this comment that has been made by a leading UK venture capitalist – “Portfolio companies are a little like children - cute to look at in the early stages, then they start spending your cash and ruining your records, before you finally lose patience with them and boot them out of the family home."
What’s in it for Private Equity Firms?
By ensuring that management have a significant personal stake in the business, private equity firms align the goals of the management teams with their own. By turning the managers of the business into owners of the business, they ensure that 100% of managements focus is on growing the business.
In addition, private equity firms take significant comfort in existing management’s knowledge of the business, of the risks it faces and the feasibility of the proposed business plan.
What typically constitutes good MBO opportunities?
Ideal opportunities for an MBO exist where:
§ A large corporation decides that part of the business has become “non-core”.
§ A purchaser of a diversified company may not want to operate all of the constituent businesses he has acquired.
§ A large company becomes insolvent but a division of that company can be purchased from the Administrator / Receiver as a going concern.
§ Regulators such as the ACCC may force a company to sell part of a recently acquired group to maintain competitiveness in the industry.
§ The founder and owner of the business wishes to retire but does not have a family member in place to take over the company.
Why do owners like selling businesses to existing management teams?
Selling your business to the management team has a number of advantages over selling to an external purchaser. Perhaps most importantly, opening up your books and records to trade buyers as part of a competitive bid process allows competitors access to sensitive information that could adversely affect the value of the business and therefore reduce the likelihood of a full value sale.
In addition, an MBO can be a faster and easier means of exiting as existing management have a detailed knowledge of the business they are acquiring and are unlikely to require a detailed and expensive due diligence process.
How does the process work?
If you are faced with an MBO opportunity, the general process that is involved in successfully purchasing the business involves the following steps:
- Agree members of Management Team who will participate in the MBO;
- Appoint financial advisors. A success fee arrangement will ensure that costs are minimised in the event that the MBO is unsuccessful.
- Approach the board of the vendor and seek approval to make a bid for the business.
- Select suitable Private Equity investors as an MBO partner.
- Appoint Legal advisors (this may be dealt with by your Private Equity partner).
- Execute term sheets (broad agreement in principle) with vendors and conduct due diligence where necessary.
- Seek debt funding to minimize the amount of equity required by the Private Equity investor and MBO team.
- Prepare, negotiate and execute legal documentation.
Australia has recently experienced an unprecedented increase in Private Equity funds under management. There is currently up to A$10 billion looking for investments. This creates real opportunity for Management Teams who have the desire to own a stake in the business they run. Quay Capital assists MBO teams navigate the process in order to maximise their chances of a successful and lucrative MBO.
|
