What makes a good M&E management buyout target?
Posted on: May 19th 2022 · read
A question we are frequently asked by Manufacturing management teams considering a management buyout (MBO) is whether the M&E company that they manage is an ideal target for an MBO. There are no hard and fast rules, but certain factors do tend to be common. Laurence Whitehead, corporate finance partner at MHA, outlines below some of the issues that will help identify if the M&E company you manage is ripe for an MBO.
Strength of management
A strong, commercial, and experienced management team is essential to ensure the transaction can be fund externally. It is important to have a full team that cover all of the functions of the business at a senior level. Members of the team may have dual roles depending on the dynamics and size of the business. On larger deals the involvement of an experienced non-executive director with industry experience will add real credibility to an MBO team.
Strong cash flow
Cash generative businesses are always better placed to achieve a successful buyout. Strong cash flow will enable the repayment of the debt raised externally to facilitate the MBO.
Unique selling points (USPs)
There may be unique selling points associated with an M&E company that make it attractive to funders. For example, it may demonstrate a competitive advantage which gives rise to cost advantages, product differentiation and/or management expertise, all of which are not easily transferable. In this situation the M&E company’s strong position may make an MBO an attractive proposition.
M&E companies that no longer fit within the existing core activities of their group are always strong candidates for an MBO. Willing vendors looking to divest of such companies will usually offer incumbent management a chance to complete a buyout unless they perceive that a trade sale would be far more beneficial, albeit trade sales come with their own intricacies.
M&E companies with good growth prospects are more likely to be attractive to funders. Visibility of future performance and strong expected returns are key to getting MBO transactions funded.
Retiring senior management and succession issues
The impending retirement of a majority shareholder can often act as a catalyst for a MBO, especially where there is no natural family succession in place. This in itself would not make for a successful MBO but, combined with some of the other factors, could help trigger an MBO deal.
From the very outset, careful consideration needs to be given to the proposed future exit route for the MBO team and incoming funders and external equity investors. A well thought out future exit plan will make the MBO a far more viable proposition, particularly for equity investors, who will also be looking for their own exit at some point. The main exit routes remain a trade sale, a secondary buyout or a float on AIM or the main LSE.
It is important for M&E management teams to clearly identify what factors make the M&E company they manage suitable for an MBO. Seeking professional advice early on can assist in this process, by helping to identify quickly whether an MBO is the correct route upon which to embark.
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