Choosing the right exit route
Article Date: Feb 08 2007Every entrepreneur selling their business wants to obtain the best combination of price, form of consideration, deal structure and compatible purchaser within an agreed timescale.
The type of exit chosen determines much of this and two popular methods of disposal are selling to another business or being bought out by your management team. In both cases, there are many players involved – the buyer, the seller, investors, professional advisers, management, employees and even family members.
In addition, there’s an array of competing ideas of how the business should be run in the future, what its growth prospects are and, crucially, what it’s really worth. With all this complexity involved, it’s not surprising entrepreneurs find it difficult to choose an exit route.
The UK buy–out market is particularly buoyant at the moment, according to statistics from the Centre of Management Buyout Research. A record number of exits (337) were completed in 2005 and their value rose to a new high of £21.7 billion by the year-end. The first quarter of 2006 has seen 29 trade sales and 161 buy-outs, of which a staggering 106 have been MBOs.
So why are MBOs so popular? One obvious answer could be the emotional advantage they have over other exit routes, fulfilling an entrepreneur’s natural instinct to pass on the enterprise they’ve nurtured to worthy successors.
Human, all too human
Mark Wignall of Matrix Equity Partners, an active backer of management buy–outs, says, ‘It’s quite common for human sentiment to make an MBO a preferred route. The perception is that the current management team are uniquely placed to understand the business, and perhaps it’s also a case of "better the devil you know".
‘We recently backed a buy–out of a company called Pasta King where the family owners had deliberately groomed their management team rather than considering selling to an outsider. There was a sense that “keeping it in the family” was preferable.’
However, one of the downsides with MBOs is that it’s not always easy to nurture talent from within the business quickly enough to meet the exit plans of the owner, nor is it straightforward to find talent from outside to bring in as heirs to the business throne.
‘For an MBO to succeed, you’ll need to sell to an identikit management team, so start putting that together far in advance of when you’d like to exit,’ says Jeremy Furniss, partner at independent corporate finance house Livingstone Guarantee.
Ideally, this would include an obvious leader or CEO-elect and a strong finance brain. ‘Even for small transactions, financial backers of MBOs will want the reassurance that a finance director or similar exists as the principal contact for key financial information,’ he says.
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