10 top tips for management buyout

10 tips for management buyout

Ever considered buying the company you work for? Mike Wright, professor of entrepreneurship at Imperial College Business School and director for the school’s Centre for Management Buy-out Research, offers 10 tips on executing the perfect MBO

1. Ask, ‘do i really want to do this?’
Wright says: “Being an owner has advantages – but it requires a big commitment. You may need a
re-mortgage, and you risk burning bridges with the current owner.”

2. Tread carefully around the owner
“In some cases, it may be explicit the company’s for sale. But read the situation carefully: the owner may have no intention to sell. Approach them indirectly, building the process towards a sale over time.”

3. Aassemble a stellar management team
“Your management team should have an MD and a finance director, and you may need to bring in an outside member such as a CEO. However, if there’s somebody that isn’t up to the job, you may have to bite the bullet and let them go.”

4. Plan finances rigorously
“How to figure how much the company’s worth? Well, it’s worth [somewhere in between] what you can get it for and how much the owner will sell it for. Come up with a range of valuations and appoint
a corporate financial adviser.”

5. Secure investment 
“Most MBOs are funded by a mix of private equity finance and bank debt. Bank financing may be 65 to 70 per cent [of the total investment] but in traditional mid-market deals, it may be 35 to 40 per cent. If you want to attract private equity funding, put a business plan together with a three- to five-year time proviso.”

6. Invest your own money
“Banks want managers to invest a ‘meaningful’ amount which shows your commitment. It is advisable to put aside one year’s salary [into the buyout]. However, don’t expect everybody in your management
team to pay the same.”

7. Don’t overpay
“Managers are sometimes so keen to buy the business, they risk over-paying. In larger businesses, this usually happens when the current owner puts the company to auction, and managers [over-bid] because they’re worried if they don’t buy it, they’ll lose their jobs.”

8. Stay focused during the process  
“The MBO process usually takes four to six months, depending on how desperate the vendor is to sell – in some exceptional cases it can be completed in a few days. During the MBO, don’t forget it’s not just about negotiating the deal: you need to keep the day job going.”

9. Utilise the owner
“The founder may want out, but he/she may be the person who really knows how the business runs. I’ve come across countless cases where the business has been sold to management for tens of millions, but 18 months later has been bought by the founder for a nominal pound. Why? They haven’t used the founder’s expertise and contacts.”

10. Celebrate (hopefully) 
“MBO failure rate is 16 to 20 per cent, much higher now than during the boom years – but many of the MBOs failing now were deals done at inflated prices during those years. MBOs can fail because the company goes into administration, bankruptcy or because you haven’t got enough to pay the bank off. In which case, it’s game over and you’ll probably lose your invested money. But… the upsides of MBOs are significant. Sometimes you can triple your investment; sometimes you can get a lot more. Financial planning is key.”


About author

Christian Koch

Christian Koch

Alongside his work for Director, Christian has written features for the Evening Standard, The Guardian, Sunday Times Style, The Independent, Q, Cosmopolitan, Stylist, ShortList and Glamour in an eclectic career which has seen him interview everybody from Mariah Carey to Michael Douglas through to Richard Branson with newspaper assignments including reporting on the Japanese tsunami and living with an Italian cult.

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