Management buy-outs (MBOs)

Management buy-outs (MBOs) - are the purchase of an existing business by its senior management team. The opportunity to carry out an MBO is an attractive option for professional managers, since the potential financial rewards are much higher being an owner rather than an employee.

MBOs also have the tendency to be advantageous for large businesses wishing to sell divisions that are not part of their core business, and for private businesses where the owner(s) wish to retire.

Although this is a rousing prospect for management teams as well as business owners, an MBO adviser is needed to help the team close the transaction. 

GKA Capital guides the team from inception through to completion and closing of the transaction. 

Our actions in this respect include:

  • Assisting with the feasibility decision and valuation of the business in view of concluding an MBO;
  • Advising on the development of a business plan and formation of the management team;
  • Recommending appropriate methods for funding;
  • Introducing the MBO team to respective funders and securing finance;

 

  • Advising on suitable acquisition tactics and assisting in negotiations with the vendor(s);
  • Project managing the transaction, including liaising with all involved specialist advisers, thereby enabling the MBO team to focus on running the business; and
  • Assisting, in conjunction with the MBO teams lawyers, in closing the transaction.

Vital to the success of any buy-out is access to suitable funders. Therefore, maintaining close contact and good relations with providers of equity and debt finance is a key part of GKA Capitals activities. The firm devotes considerable resources towards building and maintaining healthy relationships with equity and debt providers, frequently meeting with them and maintaining dialogue with them. We have also, for example, developed a proprietary database to keep track of their investment mandates and preferences. As a result, GKA Capital can readily identify and secure appropriate funds for clients in any industry or sector.

GKA Capital has the ability and experience to help management teams with attractive prospects to raise the funds they need for an MBO. Our expertise and business network will:

  • improve the MBO teams prospects of raising finance;
  • reduce the turnaround time for fundraising and minimise disruption to the MBO teams business operations; and
  • result in finance being raised on better terms.
 

 

 

An overview of the phases of an MBO transaction:

Step 1: Preparation

Preparation is key. The first step in an MBO is to analyse and evaluate the opportunity to be presented to investors. In this way, a decision can be made as to whether funds can be raised and, if so, how much is required, the appropriate funding structure and the best source for such funding. The investment proposition, including the business plan and all associated documentation and presentations, is then reviewed and all assumptions are tested to ensure that it is presented to the chosen investor group in the best possible way.

Step 2: Forming the management team

A key aspect of preparation is to ensure the management buy-out team is as strong as possible. The stronger and more complete the team, the more attractive the funding proposition will be. The MBO team may, even at this stage, include suitable non-executives alongside a full complement of executive directors in order to make the overall proposal as attractive as possible to potential funders.

Step 3: Finding the right type of investor

A crucial aspect of any MBO is the proportion of the business that will subsequently be owned by each of the funding parties – be they the management team or their backers. Different backers will require management to give up different proportions of equity – the actual percentage will depend on how attractive they find the business proposition and the return they are seeking. Certain investors have preferences as to the sector and stage of development of prospective investee businesses and almost all have upper and lower limits on the funds they can invest. Some prefer to invest alongside other parties, while others prefer to invest alone. Finding the right type of investors – be they providers of equity or debt – is vital.

Step 4: Making introductions to investors

An important feature of the service provided by GKA Capital is to direct its clients towards those sources of funds that are most likely to find their proposals attractive and then to raise funds from them on the best possible terms. Relevant sources of funds range from equity to debt and the best investor in any given situation may be:

  • a single private equity fund;
  • a syndicate of equity providers;
  • mezzanine funds – where the risk/return sought is pitched between equity and debt; and
  • debt providers, whether such debt is secured primarily on cash flows, or on property and current assets, or any other combination.

Step 5: Negotiating, managing and closing the deal with investors

Having prepared the case, decided on the investor type and introduced it to selected investors, GKA Capital helps the client choose and negotiate with one or more preferred sources of funds. We have an in-depth understanding of funding structures and advise our clients on the most appropriate split of debt and equity and the returns expected from each of these sources. In this way, the management team obtains funding on the best possible terms.

Step 6: Negotiating with the vendor

Of course, securing funds is only half the story. The management team is involved in a ‘chicken and egg’ situation, since it also has to agree on terms with the vendor. While funders may not want to put time into an MBO until the vendor has agreed on the terms, the vendor may not take management seriously if approached before they have any backing. During this stage of the process, the management team must keep a watchful eye on their responsibilities as directors of the business being sold and their obligations in terms of confidentiality. GKA Capital is highly experienced in dealing with these situations and advising management on how to proceed to reach an agreement with both funders and vendors at the same time.

Step 7: Overall deal coordination and completion

It is essential that the management team maintains a focus on running the business and not become distracted by the time consuming process of the MBO. GKA Capital takes much of the burden of managing this process, including co-coordinating with other professional advisers (e.g., tax, legal, due diligence) required for the transaction and dealing with vendors and funders. GKA Capital is the client’s key sounding board and source of advice through to completion of the transaction and the transfer of funds from the MBO teams backers to the vendor.