25 July 2019
Partner, YFM Equity Partners
For a variety of reasons, good businesses sometimes fail to fulfil their potential when part of a larger corporate structure. It may be that it is no longer deemed to be of strategic importance and cash generated (from ongoing operations or a disposal of the business) is re-invested in other “more attractive” parts of the group. Or it may have suffered from a lack of stakeholder attention and support and not progressed as well as it perhaps should have. Ultimately, there could be a better owner of the business to back its future growth – and that is often the senior management team, who understand its competitive position, the market it operates in and the critical success factors for a growing profitable business.
Why would a management team want to buy out a business?
Simply put, they see the opportunity for significant future value creation. They know and understand the company – its strengths and opportunities – and, under new ownership, a good business should have the focus and resources needed to accelerate its strategic development. This can result in faster turnover growth, job creation and increased employee engagement.
What are the issues to consider along the journey?
Firstly, proper preparation for the process is important. As with any transaction, a business plan clearly articulating the growth prospects will be needed. A carve-out deal out will also require standalone financial information, which could be a detailed exercise. Here are a few other questions:
- Are all the key customer contracts in the name of the subsidiary to be acquired?
- Are colleagues all employed by the subsidiary to be acquired? Do some people split their time between the business and the Group – will they be included in the transaction or not?
- How simple, or otherwise, will it be to separate the business from the larger organisation? Are there any functions provided centrally – finance, IT, insurance, property (to name a few).
- Doesn’t managing the business and wanting to buy it create a conflict of interest? Acting as both sellers and buyers is not without its challenges, but this is a well-trodden path and advisers on management buyout transactions are well-versed in navigating through the process.
What are the options to fund the acquisition of the business?
Management teams are unlikely to have the personal financial resources to acquire the business in full. Typically, alongside an appropriate level of participation from the team, funding can be raised from one or more of the following sources:
- Bank debt
- Loan notes from the vendors
- Private equity
There are many success stories of thriving businesses that were previously a non-core part of a larger structure, particularly when private equity has supported the management buyout team. YFM has spent over 35 years investing in UK businesses and continues to work in partnership with management teams looking to deliver stakeholder value, for example Leengate Valves and President Engineering.