MBOs work – but they require careful planning and expert advice

When someone first sets up a business, the thought of selling it doesn’t usually enter their head. They’re too wrapped up in the here and now to give consideration to how they’re eventually going to get out.

Yet, in an ideal world, work on charting an exit route would begin as soon as the business is up and running.

Of course, that situation rarely exists in reality. But all business owner/managers owe it to themselves to plan well ahead for the time when they decide they want to sell or a third party bangs on their door with an offer to buy.

I and my colleagues at EMC Corporate Finance have sold more than 200 businesses since 1989. As well as creating dozens of millionaires as a result, we’ve also seen many owner/managers throw away some of their due rewards simply because they haven’t given sufficient consideration to plotting their path to the door.

If you want to exit on your own terms, from a position of strength, good planning is essential. That applies whether you decide to sell to your management, to another business or to a family member.

Management buy-outs have become an increasingly popular route for owner/managers of SMEs to float off non-core activities or allow shareholders in private companies to find an exit without the hassle of a trade sale.

Although they tend to be complex transactions – commercially, financially, legally and, by no means least, psychologically and emotionally – they can allow a committed management team to acquire a controlling interest in their company for as little as a year’s salary.

They also allow an owner/manager to realise all or a large percentage of his or her shareholder value in a discreet and confidential way without exposing the business to the scrutiny of trade buyers.

However, it is not a journey for the faint-hearted. There are all sorts of potential pitfalls – the different interests of buyers, sellers and funders, the complex documentation which must be completed and the tax implications for all parties. Expert professional advice is essential.

A recent survey of directors who had carried out an MBO in the last two to three years produced some interesting comments. Two points which came out very strongly were that:

• Businesses should spend far more time preparing for an MBO and getting the right management team, building up cash reserves and delegating day-to-day tasks.
• There was a universal tendency to underestimate the time that an MBO takes. Almost without fail they take twice as long as everyone predicted.

However, there are very few buyout veterans who would not go through the same process again if the same opportunity existed.

That’s because they work at all levels. They provide an opportunity to release capital, ensure the continuity of the business, reward the existing management team for past services and limit the amount of disruptive uncertainty that so often surrounds a change in ownership.

Happily, too, most MBOs succeed. Key to this is getting the deal right in the first place, setting firm foundations for the MBO team to steer the company to profitability and sustainable growth… and then, of course, planning their own exit strategy.

• Nik Askaroff is Chief Executive of EMC Management Consultants Limited, the South East’s leading independent corporate trouble-shooting, interim management and corporate finance consultancy. It has offices in Eastbourne, Maidstone and Crawley and provides operational support to companies at a practical level across all aspects of business management. For further information visit www.emcltd.co.uk or call 01323 410144.