Just now, the climate for management buy-outs and buy-ins is nothing if not favourable. Large corporations, in particular the conglomerates, are coming under increasing shareholder pressure to focus on their core activities and offload other, often less profitable elements of their business. In addition, venture capital funds – one of the main backers of management buy-outs and buy-ins – are said to be flush with cash and ever-keen to make deals (by way of an example, Candover Investments’ management buy-out activities in the UK rose by 37% in 2000).
“There has been a considerable amount of offloading of non-core businesses in recent times,” stresses Jeremy Furniss of Livingstone Guarantee, specialist advisers on unquoted merger and acquisitions transactions. “Where professional management teams have been frustrated by running non-core businesses, they could now say to their Boards: ‘Allow us to buy the business from you, and back us rather than go for a trade sale'”.
One of the attractions for Boards is more discretion if you keep such a deal within the company rather than expose the business to the world at large, in particular to competitors. Furthermore, such a deal can be struck much more quickly because the buy-in team knows the business it’s buying inside out.
Of course, there could well be a problem in establishing whether or not the business really is up for sale. A mistaken or insensitive approach to the company and – possibly – initial market soundings could lead to your P45 rather than any agreement to discuss a sale!
Deals with added value
The recent pace of completed management buy-outs and buy-ins indicates that companies and management teams are becoming seriously interested in discussing such deals.
Last year alone, the total value of management buy-outs and buy-ins in the first three quarters of the year reached a record total of GB pound 17.4 billion, although according to the Centre for Management Buy-Out Research this figure includes several large public companies ‘going private’ as well as a few sizeable buy-ins.
The currently favourable climate for deals is by no means confined to those companies wishing to ‘hive off’ non-core activities. Smaller market cap companies feel increasingly neglected by institutions, and more and more larger companies disenchanted with the antics of the stock market favour going private. Another key reason is the consolidation which is taking place in many business sectors, where mergers and acquisitions are mainly about combining mainstream operations – and everything else could be up for sale.
In the food supply sector, for example, moves towards consolidation are making waves right through the industry. So says Michael Beard, who led the recent management BIMBO (buy-in and buy-out) of the Rayner Burgess Food Group as part of a ‘buy-in and build’ strategy. Beard was advised by Livingstone Guarantee’s food sector team, who made the first approach.
“Completing a management buy-out calls for a great deal of entrepreneurial skills,” states Beard. “I’m not so sure there is that much encouragement from venture capital funds. It’s a great help if you’ve been there and done that for other people before you do it for yourself.”
By contrast, John Lowe was sent on an interim management assignment by BIE to Video Arts, the training company co-founded by none other than Fawlty Towers’ writer and star John Cleese. Just like Victor Kiam, he liked it so much he decided to buy the company, and found very few difficulties in raising the necessary funds for an GB pound 8.5 million purchase.
“I’d never been involved in anything like this before,” says Lowe, “so my first task was to bring in a finance director to help with the monetary side of the equation. The management buy-out was backed by Dresdner Kleinwort Benson Private Equity and Invex Capital. We only approached two or three venture capital companies, although the negotiations rumbled on for eight months.”
Why was that, you may wonder? “There was another bidder,” adds Lowe. “We were kept hanging around. In fact, we were outbid twice, and nearly lost on both occasions. My advice to any security managers thinking of entering into buy-out or buy-in negotiations is to never let go. Never lose sight of the ‘end game’. Be absolutely firm where you want to take the business before you approach any financial people. Of course, it will help if you have a good support team in place. People who share your vision of the future. You’ll also need a watertight strategic plan to develop the business still further.”
The need for professional advice
Professional advice is critical, even for those with a commercial and financial background. Two years ago Richard Gogarty – a 35-year-old chartered accountant with a seven-year track record as managing director of a specialist manufacturing company – formed a small company with the aim of making acquisitions.
Gogarty takes up the story. “We were a group of managers with wide experience of the sector we were in, so we approached Livingstone Guarantee to look for a suitable buy-in situation. Livingstone identified Wm Warne, then owned by Electra. They made the first approach, advised on negotiations and helped to raise the necessary finance.”
Gogarty is quick to point out that venture capital fund managers will spend a good deal of time checking out the management buy-out/buy-in team before coming to any decisions as to whether or not they should support a given deal. They will look at issues like pensions and insurance, for example.
What they will really scrutinise is the strength of the management team. They don’t want to hurt you, but they do demand serious commitment from you and your team!
A point emphasised by Gogarty is one that’s well worth remembering. “It would have been difficult to do the deal without professional advisers. In our case, Livingstone Guarantee brought a lot of credibility to the process.”
What about costs? “When you are raising finance, you need to raise at least an extra GB pound 1,000,000 to cover professional advisers’ fees,” adds Gogarty. “Livingstone Guarantee charged us a modest initial retainer and then a fee on completion.”
Many of the venture capital funds which traditionally showed an interest in investing up to GB pound 10,000,000 now prefer funding deals to the tune of GB pound 20-30,000,000. Obviously, this makes it somewhat more difficult if you are a manager looking for a GB pound 5-6,000,000 deal. Do funders interfere once they’ve agreed to make an investment? “No,” stresses Jeremy Furniss. “They’re investors, not operational managers. Once they’ve backed the plan they are happy for management to run the business, provided that targets are being achieved.”
Ultimately there are indeed less complex ways of funding a management buy-out. When the owner of several successful retail outlets recently contemplated retirement, but couldn’t attract the right offer on a going concern basis (or on an attractive enough price for a prime site), his solution was an assisted management buy-out. Here, the owner and his senior manager reached an agreement by which a bank loan for the downpayment would be guaranteed by the owners, followed by a five-year pay-out plan payable to the owner. The bank wanted to charge 2.5% over bank rates, which both parties found excessive. In the end, the owner advanced the initial payment at 1.5%.
The bottom line is that life after the deal can be better than expected, and that many of the stories you might have heard about venture capitalists have been overstated.
The main lesson would seem to be to seek sound professional advice in the first instance, but don’t start discussing a deal to buy part of your employer’s business until you are sure that it’s definitely up for sale!
