A management buyout can be a win-win situation for owners and management teams.
The option of selling a business on to the current management team rather than seeking an outside buyer can be attractive for many reasons. And, with greater finance now available in the market the management buyout (MBO) is increasingly viable.
Sizeable deals during 2018 included the acquisition of Sligo engineering company LotusWorks by four senior executives with backing from AIB Corporate Banking; the MBO of Co Meath-based recycling plant and equipment manufacturer Turmec with a €4m investment by private equity firm Causeway Capital Partners; and a €150m buyout of Mercury Engineering by three senior executives with financing from AIB and Bank of Ireland. According to Mark Ward, partner and head of M&A at A&L Goodbody, one of the big advantages of MBOs from the owner’s perspective is knowing and being able to trust the potential buyer. “A non-management buyer is often somewhat of an unknown quantity to the owners,” he says. “Familiarity with the management is a big comfort.”
There are also many practical advantages, including not having to market the business and the prospect of greater continuity for customers and employees. Owners can also push for less warranty cover as the management team already knows the business and any issues relating to it, Ward says. Having this in-depth knowledge of the business obviously benefits the management team too. “They know the owners and particularly whether or not they are genuine sellers when the process commences. Also, they know the business, warts and all.”
An MBO can also represent a manager’s big – and perhaps only – chance to take a material equity position in a business, sometimes at little or limited risk. But risks do exist. “From the managers’ perspective, the key risk is the extent to which they are responsible for the debt they inevitably have to borrow to complete the deal – is that debt limited recourse to their interest in the deal or are the management taking on more risk? “Also, management often become partners with private equity and that relationship, compared to previous owners, can be a new culture and to that extent a risk for management.”
From the business owner’s point of view, Ward points out that MBOs have many moving parts, including debt, equity, purchase documents, bank level diligence, post deal inter shareholder agreements and what might happen to the relationship with management if the deal does not end up completing. Ward recommends that executives look for advice early on in an MBO process. “Funding advice and legal advice are two of the most important areas. Private equity or banks may also need some commercial diligence done on the business so lining that up early is a good idea. “On the legal side, early assessment of the risks and where it might go wrong is, in my opinion, always a good exercise. It’s important to set out the terms of the finance, the acquisition deal key terms and the inter-shareholder arrangements between the management and possibly private equity early in the process. This will save a lot of unnecessary haggling and disagreements towards the end of the process.”
This article was first published in the Sunday Times, 31 March 2019.