Is a buyout part of your exit strategy?

buy out

By Kevin Paget

Low interest rates and the strong availability of credit through equity and debt finance is fuelling the buyout market; allowing management teams to take up the challenge of acquiring and controlling a business. Despite this, some business owners pursuing a sale may not realise that a potential buyer could be close at hand.

When a shareholder is considering an exit, they sometimes think a trade sale is the only option and would be more likely to achieve the value they are seeking. They may not have considered selling to the management team because they believe the individuals involved lack the resources and/or capability to take on the running of the business and make a success of it.

At this early stage, depending on the vendor’s specific requirements, the adviser may suggest a management buyout and highlight some of the benefits that this particular exit route could bring. For example, not all vendors want to exit the business completely. They may simply be looking to ‘de-risk’ and take some money off the table, whilst staying involved in the running of the business for a few more years. By selling the business to the management team, they could achieve this, whilst also protecting the long-term interests of the business and its workforce.

There are many other reasons why a management buyout could provide the right exit option. For example, vendors may be cautious about sharing confidential financial and market information with a potential trade buyer, especially if a competitor, for fear of how they might use this data if the transaction didn’t complete. Also, if word gets out in the market that a business is being marketed for sale this could be unsettling for both employees and customers and could have an adverse effect on trading performance during the process.

By contrast, if the deal is well structured and the debt repayment plan is manageable, selling to the management team could represent a relatively low-risk option for all concerned. The strong availability of private equity money and competition between a variety of debt funders, including high street banks, challenger banks, asset-based lenders and alternative lenders, all looking for suitable buyouts to back, means that securing the required finance could be more straightforward than they might think. For lenders, the fact that the management team is usually required to invest a modest amount of their own cash, provides an extra layer of reassurance.

Once the vendor’s eyes have been opened to a potential management buyout, the adviser will typically front the negotiations between the vendor and the management team; presenting the case regarding valuation, deal structure and funding. The adviser’s involvement in the negotiations also helps to buffer and protect the working relationship between the parties. The adviser will also assist in the production of a robust business plan, supported by clear financial forecasts and assumptions, which will be used to inform the structure of the deal and secure the financial backing for the transaction.

Most vendors appreciate that there is no point in structuring a buyout on terms that are unsustainable. Detailed financial modelling is required to establish how much debt financing can be taken on, without financially crippling the company going forward. This also helps determine the structure of the transaction regarding the amount of money that can be paid to the vendor on completion and the amount which needs to be deferred. It is important to ensure that there is sufficient headroom in the business to allow for variables, such as the loss of a key customer or a shift in market conditions. Taking account of these factors, advisers are able to structure the right deal for those concerned.

Finally, the idea of selling the business to the management team can be an incredibly exciting time for the individuals affected, particularly those who will be taking a share in it going forward. However, the deal process can take time (typically six to 12 months) and it is important that both the vendor and the management team stay focused on running the business and delivering a high-quality service to customers during the process. By assuming responsibility for project managing the transaction, the adviser can help to protect the organisation through this period of change, by handling as much of the workload as possible.

When considering their exit options, vendors should not overlook a buyout. Depending on their personal goals, selling to the existing management team could deliver the right package in terms of value and security, whilst protecting their legacy for years to come.

Kevin Paget is a corporate finance director at accountancy firm, Menzies LLP.

Kevin Paget