Management Buyouts make for a popular choice

Management buy out (MBO) acquisitions are finding increasing favour in the current Irish corporate transaction market, thanks in no small part to greater availability of finance, in addition to new and innovative options available to management teams.

"A management buy-out (MBO), which is an acquisition of a business led by the company's own management and executives, can be an appealing prospect as it represents an effective way to transition equity ownership to those executives already working in the business." Said Laura McCoy, M&A Director, Deloitte.

“The management team and executives rarely have the necessary funds to buy the company on their own and typically additional finance will be raised, either in the form of equity or debt financing, or a combination of both."

“A consistent rise in MBO activity since 2015 is under- pinned by important innovation in funding  options, and Irish business has become more aware and more open to opportunities to partner with an external party, such as a private equity (PE) fund, who can provide funding and expertise in exchange for shares in  the company.”

She added: “The funding environment has improved globally post-recession with a huge amount of ‘dry powder’ available."

Because less deals were done during the recession years and from 2015-2016, PE funds available for investment built up. There is currently an estimated $800 billion of global PE capital available to be deployed in investments worldwide.”

McCoy reported that with a mature PE market in Britain, some of those funds are increasingly looking to Ireland in search of investment opportunities and Irish management teams are beginning to take advantage.  She said: “The positive funding landscape is resulting in premium multiples for quality assets.”

As an indication of international funds and particularly British PE funds looking to Ireland for investment, McCoy points to the recent establishment of an Irish office by Business Growth Fund, looking to invest in Irish SMEs. McCoy identified technology, travel and media as the most active sectors. But, activity is by no means limited to those sectors. Deloitte recently advised on the MBO/PE trans- action which saw Sovereign Capital (British PE fund) invest in Arachas Corporate Brokers, Ireland’s fifth largest non-life commercial brokerage.

“PE funds generally back management teams to grow the business and seek to create incentivisation through equity participation, an approach aimed at achieving a maximum success for both parties when the equity firm ultimately exits the business,” said McCoy.

“There is a huge difference in the types of PE funds. Some are specialists who can help a business to access additional expertise in their sector, other equity funds are sector-agnostic and more operational in their focus with an emphasis on scaling up and helping to grow the infrastructure within the business or making acquisitions.” Some funds will have a tightly defined exit time- frame, typically three to five years, while others will have a longer-term outlook. Some take a majority share while others are happy to invest in a minority share of the business.

“The right option for any business depends on the management and shareholder aspirations, as to the type of partner they are seeking, and also the type and size of the business. Personal chemistry and trust should play a central role; after all, you need to work well together to achieve a successful ultimate outcome.”

The management team, for their part, need to have certain things in place in order to be MBO-ready and to successfully raise the required funding. “There are two key considerations,” said McCoy. “The first is the need to align the various shareholder objectives from the outset. That’s not an easy task because those in the mix might have very different ambitions and motivations.

For example, existing shareholders may be exiting with immediate effect and be driven by maximising the underlying value on exit; others might be partly exiting but retaining an investment, while the management team may be seeking to acquire the business at a lower price and, therefore, generate the maximum return on the ultimate exit.”

This is where an experienced adviser will add value. Observing the big picture at arm’s length, they can help bring clarity to the situation and help strike a balance amongst stakeholder objectives. The second major consideration, according to McCoy, is to have a robust business plan in place.

“It needs to be based on credible assumptions and must stand up to the rigorous due-diligence process conducted by the investor. The management team need to look at the business plan from an investor’s point of view in order to identify and deal early on with any issues that might arise. “Added to that, they need to assess and clearly communicate why their business is special.”

The M&A team at Deloitte is highly experienced when it comes to advising on MBOs. McCoy said: “We understand the process and we know the pitfalls. We also work closely with our British and international teams to understand the latest trends and implications for Irish businesses.”

The bottom line, said McCoy is that demonstrable growth and a capable and ambitious management team will represent an attractive prospect to investors across the globe, not just in Ireland.  

Originally appeared in the Sunday Business Post, Corporate Transactions Special. June 25th 2017. By Margaret O'Brien.

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