Wednesday 28 September 2016

This looks like being the year of the MBO

Mark Flood

Published 20/12/2015 | 02:30

Mark Flood
Mark Flood

When people plot their careers and prospects, many think they have to choose between their current PAYE role or leaving their job to chase their dream and being their own boss.

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Very few realise that they can become their own boss without leaving the job they are currently in.

Management can own the business they work in by participating in a management buyout (MBO) and create equity value for themselves.

So often people see far away hills as being green and do not realise they are standing in their own acre of diamonds at this very moment. MBOs are commonplace where the owner decides to sell and management agree to buy in partnership with a bank and equity partner.

Many owners start from nothing and create a great business but may not have the good fortune of having their next generation motivated and capable enough of emulating them in their role of leading their company through the next decade and beyond.

They are then faced with deciding what to do with the business.

It will be hard to get an ambitious PAYE employee happy running it for the owner as a job. The alternative option of the owner continuing to run the business themselves questions whether they will ever get to enjoy the fruits of their labours and really smell the roses of life.

The third real option is to facilitate their current management team in buying the business from them.

Good planning and advice is key. The option of getting an outside corporate finance firm to value the business and allow the management to write a cheque to the owner for the business is often never considered.

An MBO is often more favourable to running a wider sales process where some confidential information can get into your competitors' hands or some businesses may try and buy a business with a view to breaking it up. By selling to management, a new impetus is created for the company - and a new momentum generally emerges.

For the owners, they are probably going to get as much of a return from the sale as they would over the next five or six years if they kept the business and it plateaued (and we all know if a business is not being driven on, it will probably go backwards).

This leaves them with less at the end of year six or five than they would get from a cheque from selling the business today.

Importantly, the proceeds from a sale, along with the cash in the business can be extracted in a much more tax-efficient way than trying to extract through salaries/dividends on an annual basis. Therefore when the relevant stakeholders, beyond the owners, are taken into account (staff, managers, suppliers and customers) an MBO is often in the best interests of everybody, including the owners.

A management team buying a business will have to find backers to support them to raise the equity cheque needed for the buy out. It will only be worth doing if they firmly believe they can increase profitability significantly with their new approach.

The main banks will very likely fund 50pc-70pc of the purchase price and management will seldom have the personal resources for the other 30pc-50pc and will require a strategic partner to help bridge the gap needed to fund the entire purchase price. This is where private equity firms, such as ourselves in Renatus, come in.

We can fill this funding gap, partner with management, help them with bank negotiations, strategic finance planning and general expansion of the company - thus giving management a share of the business for themselves.

The banks get comfort when there is a private equity house partnering in the buyout and the management should welcome a strategic partner to help them realise the full potential of the business. The majority of private equity deals ensure that management get a significant share of the business - this is generally referred to as sweat equity. Recent MBOs in Ireland include Goldcore, Walls Construction, Carroll Cuisine, Abtran, H&MV Engineering, Elverys and Ardmac.

The plan would normally be to work in conjunction with a private equity house and build the business over three/five years to a point where it can either be sold or where further bank debt can be raised to buy out the private equity partner, letting management own the business in its entirety.

There are a number of good corporate finance houses in Ireland who have specialist experience advising on MBOs and both management and business owners should seek such advice in order to ensure the deal is structured appropriately.

All the signs are that 2016 is going to be the MBO year. Owners and management were too busy steadying their ship or surviving to focus on exiting or buying the business.

Now the world feels a little calmer and recovery for many has arrived there is time to step back and look at these options.

There is a pent-up amount of these businesses given the paucity of deals since 2007 - and it looks like 2016 is going to be the year of the MBO.

Mark Flood is a director at Renatus Capital Partners

Sunday Indo Business

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