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Stephen Campbell, a partner at Panoramic Growth Equity, the leading equity investor in fast growing, entrepreneurial companies, has devised the top ten questions management teams should ask when undertaking a management buy-out (MBO):
The bulk of the finance required to purchase the business will normally be provided by financial institutions, primarily from banks and venture capital/private equity houses. Debt and working capital facilities (loans and overdrafts/invoice discounting) are typically provided by a bank and are the cheapest form of finance.
Stephen comments: “It can sometimes seem a daunting task to consider an MBO and at times, management teams will more than likely be suffering from a number of doubts as to their capabilities in running a business of their own. To help you through this process we have devised the top ten list of questions you should ask before proceeding with an MBO.”
Could you run this business better than the current owners?
There are usually two types of buyouts. Firstly, where a founder has built up the business and wants to sell and secondly, where it is a part of a larger group. In the first scenario, the founder often starts to lose
interest after decades of hard work and can be a hindrance, not a help. We met with one MBO team recently who said that they spent 40% of their time managing the personal eccentricities of the owner rather than running the business. In the second scenario, your company may be a small part of a big group where a distant HQ has no idea about your business but tells you what to do.
Would you back this belief with your own cash?
Any investor is going to want to see proof that you believe so strongly in your company that you will back yourself with your own cash. The amount of cash is relative to your situation. A £25k cash input from a young, hungry MBO team may be more meaningful than a £500k cash input from a wealthy team.
Historically, most MBO teams provided their cash input from re-mortgaging their house. This is a more difficult option now in the current environment. For these reasons, Panoramic has been working on allowing
MBO teams to buy part paid shares so they are getting a meaningful stake in the business and committing to putting their money in, but it can be done over time rather than all on day one.
Can you explain clearly to an outside investor how you would
grow sales, improve efficiency and/or cut costs? Step one in any MBO is for the management team to draw up a business plan. This doesn’t have to be a 100 page document. Most investors will admit they have made a decision on whether they like a business in the first five pages of a business plan so make it punchy and clear.
Are you ‘backable’? Are there any big gaps in the team, do you
have a good finance director and sales director? Is the team together in this, or do any members want to keep the ‘comfort blanket’ of what they know? If a member of your proposed MBO team
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MANAGEMENT TEAMS MANAGEMENT
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