Management Buy-Out

isn’t fired up with enthusiasm to buy the business within the first week of mentioning it to them, then it is likely that when it comes to the crunch, they will take the safe option and stay put. We’ve seen it before – they’ll make the right noises but try and ride two horses at once. So unless they are fully committed, start looking elsewhere to fill that gap.

Are you resilient enough to take months of negotiations,

diligence and set backs until the business becomes yours? Have no doubt that this will be tough and there may be points when you wonder what you are doing. You need a fully committed team with no passengers.

Ideally, get exclusivity from the seller at an earlier stage to avoid you doing all the work only for them to sell to someone else.

Would your customers stay with you if you bought the business? Have you asked them? You should test out your plans with the customers you know best and can have a hypothetical ‘if I bought the business, what would you do’ conversation. Often, customers have been in your shoes before or like the excitement of management running the business and will help with offers of support.

Be honest with yourself – what admin service/sales leads/

general credibility is provided by the current owners that you won’t have when you buy the business? What effects will this have and how do you respond to these gaps? It is really important to avoid wishful thinking – corporate HQ may be a pain but there are probably things they do for you that you’ll have to do yourself such as insurance, accounting systems and HR.

Do you have a trusted advisor who will guide you through the

process? If not, try and find one. Speak to banks, fellow business owners, investors and contacts to see if there are any advisors they would recommend to help you. This is an important step but if in doubt, you will be better off with no advisor than a bad advisor. Unfortunately, we’ve seen example of where a poor advisor can kill a purchase by being unduly aggressive or covering their inexperience with bluster and poor guidance. One big myth is that you need an advisor to approach funders. We are happy to speak to anyone, even for an exploratory chat. One of our best investments came from the CEO phoning us directly and saying he was thinking about buying his company. Three months later, he owned it and he has now grown profits seven fold in four years.

Can you raise enough finance to cover operations

after the buyout? Always raise more money than you think you need. A fellow investor once explained the “oh ****” factor which is when you go to the first board meeting and find out something has come up that nobody thought of or could even have foreseen. If something will go wrong, generally it will go wrong very quickly and usually when you’ve got the least amount of money. To protect yourself from the ‘Oh ****’ factor, raise more money than you think you will need from banks and investors, even if it costs that bit more. Think of it as a second parachute.

It’s tough but the rewards of running your own business in the way that you think it should be run will far outweigh the work involved with getting to that ultimate goal.

Step one in any MBO is for the management team to draw up a business plan.

How will your suppliers respond to a change of ownership, e.g.

cut credit terms? Have you asked them? This is more important if you are buying your business out from a large group. You may have benefitted from economies of scale in material purchases and also corporate overheads such as insurance. Also, what credit terms are you on now? If it is 60 days, work out what happens if the supplier only gives you 30 days payment terms. On the positive side, you may be amazed how many unnecessary overheads you discover when you are spending your own money!

Contact: Stephen Campbell Tel: 0141 331 5100 Email: stephen@pgequity.com Website: www.pgequity.com