The golden rules of management buyouts
Article Date: Sep 19 2006
in association with Ernst & Young:
Management buyouts offer superb opportunities for business leaders to achieve significant financial rewards. Ken Williamson, UK head of mergers & acquisitions, Ernst & Young
Any business leader with the chance to participate in a buyout should look realistically, but enthusiastically, at the prospect. For anyone with an influential management role, a buyout can represent a highly lucrative opportunity.
To maximise the likelihood of a successful buyout, you should be aware of a number of golden rules. Before you set out, weigh up the business’ potential against these precepts. As the deal progresses, ensure you follow each rule as closely as possible.
Build a quality team
Whether you are seeking private equity, debt or an alternative like integrated finance, you will find that present-day funders back the management team first, and the quality of the business second. Nowhere is this more true than in the middle market. Ensure that your team covers all the essential skills, has a shared vision and can demonstrate a successful track record. You must fully understand your customer base and your markets. And you must take succession planning seriously. One advantage of private equity is that the right private equity house will enable you to tap into some diverse business expertise.
Construct a robust business plan
Your business plan must show insight and imagination as well as thoroughness. It must address the market and the competitive landscape as well as market share. It should reflect the history of the business as well as its prospects, and should analyse the company’s sensitivity to both upsides and downsides. The plan needs to show understanding of the intended funder’s own requirements for debt cover and capital growth. If private equity is likely to be involved, the planning should consider the backer’s exit options, for instance by including a list of companies that might want to buy the business in three to five years.
Ensure you have quality earnings and cashflow
To be backable – by you or by outside investors – the business must show some quality earnings; if it has only one or two short- or medium-term contracts or depends on a handful of large customers, it is probably not a very attractive play. In the same way, the business must be able, independently, to generate predictable cashflow. The debt needed to pay the vendors and establish the business in a position where management buyout equity funding can work will be impossible to raise unless the lenders can see a reliable cashflow to meet interest and repayment terms.
Be well prepared in discussions with funders
Remember that debt providers are quite different from equity backers, and that houses have different styles and requirements – and track records! Preparation will help you to get the right partners, negotiate the best deal and have best prospects of completing the transaction and making money down the line. After completing the deal, develop a strong professional and personal relationship with the backers.
Think like a tiger
Stiffen the sinews, summon up the blood… You will need nerves of steel, the patience of a saint, bucket-loads of tenacity and inexhaustible energy – management buyouts present great opportunities, but they are difficult to deliver. There will always be setbacks along the way, due to pressure from owners/employers or competition from other bidders, yet in the meantime the business needs to be driven forward.
Management buyouts aren’t for everyone. Entering into a buyout requires the ability to live with risk, but with commitment and discipline the risk could pay off.
Ken Williamson is Ernst & Young’s UK head of mergers & acquisitions. Contact Ken on 020-7951 5392 or kwilliamson1@uk.ey.com.
This article was originally published in Masterclass magazine.
