Avoiding pitfalls in a management buy-out – Investec Comment

A management buy-out, when a management team buys a company from its existing shareholders, should be a win-win situation. The management team, alongside its private equity backer, gets to acquire the business they have worked hard to build. For the selling shareholder, the business’ management team is in theory the most educated buyer they could wish for. They understand the value drivers and growth potential of the company on a significantly more granular level than any other party and, in more emotional terms, an exiting owner can feel that the business is being passed into trusted and capable hands.

 

However, buy-outs are rarely straightforward and inadequate preparation can jeopardise the likelihood of success. Aligning objectives among the management team and business owners is key, particularly given that some executives will be at different times in their careers and the transaction will have different risk and reward dynamics depending on the individual. 

 

In short, a management team contemplating a buyout needs to establish the nature of its commitment to the forward business plan, and work together well before it approaches the business owner and subsequently potentially interested buyers.

 

Given the potential pitfalls involved, once you’ve assembled your team and established that the owner is open to a buy-out, finding the right adviser is vital. The adviser will guide the management team through the complexities of the transaction – from helping to secure financing (both debt and equity) to conducting the negotiations. 

 

Given the complexity of a management buy-out, working with an adviser who can maintain maximum optionality on the various financing options (from private equity and debt to family office wealth) will help minimise execution risk and maximise transaction certainty.

 

There will also be potential for conflicts of interest, so agreeing an indicative valuation for the management buy-out early in the process is important to remove what can otherwise be a common stumbling block. An experienced adviser will be able to guide management on what represents an appropriate valuation level for the business.

 

So at the heart of a successful management buy-out is preparation. Before proceeding too far down the management buy-out route, you need to get a trusted adviser on board to help agree in principle key issues such as shareholder objectives and appropriate valuation. This will help avoid insurmountable challenges from being presented later on in the process and will facilitate securing third party financing for the deal.

 

Today’s buyer universe is the most multifaceted and global it has ever been. Even the most experienced management team or business owner will not be able to correctly predict the ultimate winner of a LBO M&A process. Choosing an adviser that combines a deep understanding of how to best position your business to these very different buyer pools will help optimise the process result and achieve a win-win for all parties.