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Getting serious about a buy-out

I’m interested in carrying out a management buy-out of the business I’ve worked for as sales director for the past six years. In that time, revenues have grown at an average of 18%. Despite a slight dip last year, the signs are that there is a good deal of growth left in the business. My managing director is in his mid-fifties and has mentioned that he may seek an exit in the next year or so. However, he hasn’t yet hired an adviser to explore this (as far as I know). I want to pre-empt this with a proposal to take over the business, and think a couple of the senior managers are with me. However, I would need some private equity backing and/or bank debt to carry it out successfully. I suspect the business will be valued at around £6m to £10m, depending on the valuation method used. How should I go about initiating the process? What do I need in place to make an offer, and what should I be aware of before going any further?

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A. Guy Rigby writes:

The opportunity to lead or participate in a management buy-out (MBO) is often the biggest financial opportunity of an MBO team member’s life. If successful, the rewards for both the outgoing and incoming owners can be substantial.

There are three key questions to consider in preparing for an MBO:

Is the owner willing to sell the business and is it likely that the management team would be a credible buyer in the their eyes?

This is a judgemental issue, but a business with a particularly dominant owner is likely to present a greater challenge than one with a balanced and empowered management team. In your case, the owner has indicated a likely sale, so part of this question has already been answered.

Is the business suitable for an MBO and could the transaction be funded?

Private equity firms and lenders will only fund an acquisition if they can see a clear way of getting their money back, along with their required return. In this case, a concern may be raised about the dip in last year’s sales, so this would need to be carefully explained, together with evidence of growth potential and the prospect of positive cashflows in the future.

Does the management team have the expertise and skills to successfully build the business in the future?

This will be partly dependent on the owner’s role in the business, and whether this can be filled by an existing member of the management team. If not, then the business may need to consider bringing in an management buy-in (MBI) candidate.

As the sales director, are you intending (and suitable) to take on the position of managing director?

Unless they have proposed the MBO route themselves, some owners may regard an approach by employees as particularly difficult and sensitive. MBO teams are sometimes considered as ‘the enemy within’, and this could put your relationship and future career at risk.

Your first step, therefore, should be to seek advice on these issues from an experienced corporate finance adviser. If the questions can be answered satisfactorily, an approach to the owner can be agreed. If not, it may be best to let sleeping dogs lie.