Where Next For The MBO?

Recent data from CMBOR shows that the number of Management Buy-Outs being completed is at a 25 year low.

In value terms, the market is nearly 90% down when compared to the high of 2007. But it’s not all bad. 2007 was skewed with some very large deals going through, and 2010 has shown some early positive signs.

There have also been an increasing number of owner-managers setting up businesses over the past 18 months. In some situations, this has been a case of needs must with the threat of redundancy spurring individuals on, or it could just be drive and determination coupled with the recessionary environment creating opportunities that didn’t otherwise exist.

These owner-managers have joined a well-trodden path, setting out on a journey of many years of hard work to build a successful business and making a reasonable living along the way. There will come a point where retirement or the need for a new challenge comes across the horizon, when succession planning or an exit route becomes a new focus. It can’t be put off due to the state of the market and economy.

Reaching this crossroads and facing the issues associated with it is will come to most owners at some point. It’s not just cash on exit that’s important; for most a loyalty to the staff and their future wellbeing is also high up on the agenda. A desire to see the business flourish and to do the right thing for the workforce is a key consideration. Will a trade sale to a competitor create redundancies? In the right circumstances, giving the management team the opportunity to complete an MBO of the business may well be the answer that satisfies these concerns while still yielding a full price for the business.

Outside of the arena of owner managed businesses, the current economic climate has forced a number of larger businesses to sell off non-core assets to raise cash. As the economy continues to make slow progress out of recession, management teams have a great opportunity to take advantage of changes in strategy or to be proactive and offer an MBO solution to cash-strapped parent companies.

So having reached the decision to attempt a management buyout, where do you go to raise finance or just find someone to discuss it all with?

Almost all managers that complete management buy-outs do it only once in their lifetime, encountering many new areas of experience during the process. However, buying your business needn’t be an isolated process. An advisor will take you through the common pitfalls and find you solutions to your concerns. A good advisor will work hard to ensure that the deal is delivered, focusing on the areas that are important to you.

Is now a good time to buy or sell or neither? The market dynamics don’t seem great. If funding is required by an MBO team, then this is certainly more difficult to raise in the current environment than it has been in the past. Profit multiples have reduced, meaning that business valuations are lower now than over the last few years, but can funding be found and at sensible rates?

The private equity community is awash with cash, increasingly funding deals 100% and removing the need to use any bank funding at all when deal-doing. While the market is undoubtedly challenging, deals are getting done at sensible valuations and there are many funders out there interested in quality assets.

Orbis have completed seven deals already in 2010, with more in the pipeline. One of these deals was the management buyout of Elite Creations Group from the family shareholders. Elite is a designer and importer of fast fashion accessories, selling to UK retail groups and exporting to Europe and the Middle East. The deal saw two brothers, Nitesh and Lavesh take over a business that was founded by their father over 35 years ago. The deal was supported with funding from HSBC bank.

A further deal, completed by Orbis and funded by LDC, is the management buyout of Antler. Antler is the UK’s number one luggage brand, sold through its own network of UK stores and concessions. As well as these deals, Orbis have completed a further three bolt-on acquisitions for a business that went through an MBO within the last 12 months.

So there is positive news out there for the future of MBOs despite the disappointing statistics. Most venture capitalists will agree that the best returns they make on investments are in those businesses bought in the difficult times, so funding is out there for the right businesses. Now is a time of opportunity for management teams to complete MBOs while markets are getting back on their feet, with real growth prospects ahead. As the green shoots start to push through, this is the perfect time for MBOs to flourish.

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The statutory directors of Orbis Partners Ltd are Chris Gregory, James Grenfell, Gary Ecob and Shah Zaki.