The dos and don’ts of a successful MBO

There are many critical factors that must be considered when managing mergers and acquisitions (M&As) and management buy-outs (MBOs), including successful deal-structuring and skilful negotiations, all leading to what stakeholders hope is a successful completion.

Michele Connolly, partner at KPMG, says that for an MBO to be successful, it is critical there is a good relationship between the MBO team and the vendor.

“If the MBO fails, you have a management team that are typically out of a job and you have a vendor that doesn’t have a management team. You really need a willing buyer, willing seller and a good relationship for an MBO to work in the first instance. You also need a clear outline of expectations, so you don’t get well down the track and then discover you have a massive price gap between the two parties,” she says.

Paul Keenan of Capnua Corporate Finance says that 2018 is a great time to explore selling a business, as valuations are at an all-time high, as well as there being an abundance of money out there in terms of debt-financing and private equity.

“MBOs are useful when your management team are critical to the business and without their support it may be difficult to sell the business.

“Management can get access to money now and can structure MBOs where they might take over 100 per cent of the business or they might take a significant portion out, with a follow-on kicker. As the vendor, if you are worried you are not getting full value, you can participate in the upside by retaining a stake in the business.

“MBOs are very emotional, from both sides, and it’s hard to put the genie back in the bottle, so it’s very important to be well-advised. The vendor can also offer solutions to the management team. If you enter into a proposed deal, you have to make sure it closes out. It’s hard to go back and say, I am just an employee.”

Confidence

Katharine Byrne, partner at BDO, says there has been a notable increase in MBO activity underpinned by three factors: confidence in the economy and business growth; availability of funding; and improvement in valuations.

“MBOs are often preferred by owner managers or family shareholders looking to exit without having to go through a full sale process. But MBOs have also been particularly useful for corporates seeking to divest of non-core businesses in a quick and confidential manner, as they can structure a deal that achieves both parties’ objectives. This can involve management teams bringing in a strong financial backer to support the buy-out and the business-growth plans, or it may involve staged payments or potential rollover by the existing shareholders to avoid too much leverage or financial strain on the business,” she says.

There is no pre-set way to structure the buy-out, according to Byrne, but the key is for management teams to be aware of the funding options that are now available to them and understand each funder’s criteria.

In terms of M&A, Connolly says increasingly at KPMG they are finding an emphasis on more preparation by the businesses before they bring themselves to market. “Where a lot of the due diligence side might have been sorted out at the end of the transaction, the emphasis now is on the business getting itself fully ready for sale and unearthing and dealing with any of the problem factors before they actually bring themselves to market. It gives them a better price and leads to a smoother process for any of the interested acquirers.

“Certainty of financing continues to be a big one but again, in days gone by, you would have had a scenario where the finance for the acquirer was being sorted out after the price had been agreed and accepted. That’s no longer as acceptable as it once was and you’re expected to come to the table ready to write the cheque,” she says.