A commercial edge makes a company a prime target for a MBO

Jan 05, 2021

What makes a good management buyout? Laurence Whitehead, senior corporate finance partner at MHA MacIntyre Hudson, outlines the key issues that will help to identify if the company you own or manage is ripe for a MBO.

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Strength of management

A strong, experienced management team is essential to ensure the transaction is attractive to funders. It is important to have a team that cover all the key functions of the business at a senior level. 

Members of the team may have dual roles depending on the dynamics and size of the business. On larger deals the involvement of an experienced non-executive director with industry experience will add real credibility to a MBO team.

Strong cash flows

Cash-generative businesses are always better placed to achieve a successful buyout. Strong cash flows will enable the repayment of debt and interest in the geared new company set up to facilitate the MBO.

Unique Selling Points

USPs make a company attractive and/or niche, thus giving it a commercial edge over other players in the market. For example, it may demonstrate a competitive advantage which gives rise to cost advantages or product differentiation.

In this situation the company’s strong position will make the MBO a more attractive proposition.

Laurence Whitehead, corporate finance partner at MHA MacIntyre Hudson.

Sector

Companies in strong growth sectors will be favoured over slower growth sectors. If there is excessive competition or overcapacity in the sector, this may potentially make it more difficult to obtain funding.

MBOs in sectors that are perceived to be riskier may also be more difficult to fund but essentially it will depend on the particular circumstances of each case.

Non-core subsidiary

Companies that no longer fit within the existing core activities of their larger group are always strong candidates for a MBO. Willing vendors looking to divest of such companies will usually offer incumbent management a chance to complete a buyout unless they perceive that a trade sale would be more commercially beneficial.

Growth prospects

Companies with specific growth prospects, even in slower growth sectors, will be attractive to funders. Visibility of future performance and strong expected returns are key to getting MBO transactions funded.

Retiring shareholders and succession issues

The impending retirement of a majority shareholder can often act as a catalyst for a management buyout, especially where there is no natural family succession in place. This in itself would not make for a successful MBO but, combined with the other factors, could help to trigger a MBO deal.

Exit route

From the very outset, careful consideration needs to be given to the proposed exit route for the MBO team and its investors.

A well planned exit plan will make the MBO a far more viable proposition, particularly for equity investors, who will also be keen to understand how their own future exit from the business will occur.

The main exit routes remain a trade sale, a secondary buyout or a float on AIM or the main London Stock Exchange.

Conclusions

It is important for management teams and vendors to clearly identify what factors make the company they manage or own attractive as a MBO target. Seeking professional advice early can assist in this process by helping to identify quickly whether a MBO is the correct route upon which to embark.  This is where we can help at the outset. 

So if you’re looking for high quality, independent M&A advice from one of the leading deal teams in the country, contact Laurence Whitehead to arrange an initial, no-obligation introductory meeting. email laurence.whitehead@mhllp.co.uk or call 01908 662255.

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