The time is right for MBO’s 

Management Buy-Outs (MBOs) are a very effective way of transitioning ownership to executives already working in the business. While MBO’s became a rarity during the recession years, 2015 and 2016 have seen a rise in MBO activity, underpinned by a strengthened funding market. 

“The funding market for MBOs in Ireland is particularly strong, and where businesses can articulate well formulated growth strategies and the potential to become market leaders in their particular niche, the opportunities to attract world-class equity partners to support their growth plans are clear,” said Anya Cummins, partner, corporate finance, Deloitte. 

Private equity backers will typically invest in, support and incentivise strong management teams which have credible organic or buy and build growth strategies that deliver attractive returns to all shareholders, and are usually looking for an ultimate exit from the business within a circa five-year period. 

In her view MBO’s can offer a win-win solution.  “Founding shareholders can extract some capital from the business but may not wish to exit entirely, and management teams are motivated to take the business on to the next level of growth. 

“From a management perspective, an MBO presents a great opportunity to own the business they are already running and by allowing them to invest in the business they can deliver an accelerated growth plan.”

Cummins confirmed that MBO transaction volume was up in 2015 and again in 2016. “The markets are strong, businesses are performing well and despite macro-economic uncertainties these factors bode well for increased MBO activity. One of the key determining factors for a successful MBO is if the vendor is willing to sell at a reasonable price that makes sense for the management team and their financial sponsors to buy the business out while realising a strong return on the ultimate sale.” 

As she observed, what makes every MBO transaction tricky is the inherent and natural conflict of interest between existing shareholders and the management team. 

“The shareholders are typically driven by maximising the underlying value achieved on exit. Management teams on the other hand usually have limited equity stakes in the businesses at the point of the buyout and therefore they are buyers rather than sellers - seeking to acquire the business at a lower price and generate the highest return for the management team on the ultimate exit” said Cummins.

She added, “Aligning objectives and preparation are the two critical things to get right to effect an MBO deal. From the outset you need to understand the management team and vendor’s objectives and get an advisor on board early who can act on behalf of both parties to achieve a successful deal will satisfy both parties.  

“Preparation is also key.  It is absolutelycritical for an MBO team looking for funding to have a robust business plan in place that is capable of withstanding rigorous due diligence. 

Cummins argued that there is no such thing as a typical funding structure, with every business requiring a bespoke structure.  

“We look at the debt and equity mix specific to every business considering an MBO. We assess all the options including how much debt a promoter wants to take on. Some MBOs in high growth businesses will be entirely equity funded, some in more stable mature businesses may be entirely debt backed and often an MBO will be  backed by mix of debt and equity. We assess the options on an individual basis, depending on the bespoke characteristics of any particular business.” 

Cummins concluded by advising that this is a good time for management teams to consider a buy-out because of the much improved availability of funding, but she cautioned that expert advice is required in order to ensure the deal is appropriately structured and funded to suit the specifics of any particular business.  

This article originally appeared in the Sunday Business Post. 

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