MH Article

Passport To Riches

If you are looking to sell your business, you will want the best possible price. But if you also want to ensure its future growth, then consider a management buy-in. Robert Tyerman reports

A management buy-in (MBI) is a sale to an entrepreneurial team or figure with a track record and reputation, enabling them to access funding from various sources, such as venture capital groups, banks and other financial institutions to continue to develop the business.

It could make more sense than floating your company, which anyway may not be big enough or in a currently fashionable sector, and submitting to all the costly paraphernalia of the stock market.

One alternative, selling to existing management in a management buy-out, is not always possible or desirable. The in-house management may not be suitable or willing or capable of attracting the funds needed.

Another option, a trade sale, selling outright to another company in the same line of business, could have other disadvantages. As a known seller, you may find your bargaining position on price and other issues uncomfortably weak.

Negotiate a higher price
An MBI can be an attractive exit option as the MBI team and its backers have a particular incentive to make the business succeed and grow - probably more than a trade buyer. They might be more willing to reflect that in the price and other terms they are willing to offer. One leading MBI backer talks of doubling or trebling its money with an eventual sale in between three and five years and another speaks of an internal rate of return of between 20 and 30 per cent a year.

But pure MBIs can be hard to arrange. Figures from the British Venture Capital Association show that of the 1,196 deals worth £4.5 billion done last year by Britain''s private equity groups, only 29 were MBIs.

That was 34 per cent down on 2001 and the combined value of the MBIs was only £152 million. Of the 29 deals, ten needed equity investment of below E2 million, 14 required between E2 million and EIO million and only five involved more than E10 million.

Rob Donaldson, head of mergers and acquisitions at accountant Baker Tilly''s private equity division, says MBIs are ''superficially the ideal solution'', but finding the right team can be like looking for a needle in a haystack. There are lots of people doing the rounds wanting to be MBI teams as the passport to riches, but venture capital groups have backed several MBIs which have gone spectacularly wrong and are now much more careful.''

Sell your business but retain a stake
Richard Moulton of city solicitors Eversheds says the risk in MBIs, as against MBOs, is backing people who are not well versed in the business they are buying. Eversheds helped with an £8.5 million MBI at New Garrold Printing in February, but in general he says big companies can be better suited to such deals.

Larger companies ''have their own momentum, like oil tankers, he argues.'' The incumbent management can only tweak them, but someone with clout brought in from outside can make a change.''

These days, a variant on the pure MBI - its younger cousin, a buy-in management buy-out (BIMBO) - is gaining ground. This involves selling out to a well-funded buy-in team, but retaining and/or putting in a stake yourself or letting your existing management do so (as in the example of Green Corns, see case study on page 57). It is often seen as more prudent than straight MBIs.

''It takes a very brave man to do a pure buy-in these days,'' suggests Ian Nolan, managing director of venture capitalist 3i, Manchester. ''You need to ensure continuity as well as bring in new skills.''

Turf wars
One who wholeheartedly agrees with that is Duncan Innes of corporate finance and media-focused law firm Marriott Harrison.

He recently advised on a £26 million BIMBO at TRACS, a prominent care home specialist, catering for adults with mental health problems. Vendors Paul Heffron and David Westlake-Brian agreed to a deal backed by Sovereign Capital, a private equity specialist in the fields of social and health care.

The deal brought in Eric Millard, former managing director of Florence Nightingale Hospitals and a leading player in the sector, as chief executive officer, with a team which intends to work with existing management. The aim is to cash in on the increased emphasis on mental health services in the community, stemming from recent changes in mental health legislation.

Innes sees Millard, who has an enviable track record in the sector, as the key to the BIMBO strategy. And he will call the shots while he has the backing of Sovereign, which has more than 50 per cent of the new entity.

''A management buy-out has a team which knows the business and has worked together, while a management buy-in probably has neither,'' argues Innes. That can lead to destructive potential conflicts and turf wars between the existing managers and those brought in.

That is why inter-personal skills and a willingness not to tread on each other''s patch are crucial''. Innes insists such an arrangement needs a clear leader to make it work and TRACS has this in the shape of Millard, backed by Sovereign.

Getting on a buyer''s radar
Whether you sell in a pure MBI or a BIMBO transaction, identifying the right buyer or leader of the buy-in team is clearly crucial, especially if there is any element of deferred payment on the deal. The right person is usually more likely to be able to raise finance and to achieve the objectives for the business than you are.

Donaldson of Baker Tilly says buy-in candidates need a different attitude than a business'' founders in order to take it further. ''Founders are understandably often more risk-averse than the institutions which provide funding for a buy-in candidate.''

And, of course, the financial backing a buy-in candidate can obtain almost certainly determines its chances of success. ''You can waste a lot of time talking to MBI candidates with no money,'' adds Donaldson.

Tim Levett, investment director of Northern Venture Managers, who has backed many M131s in his time, says in most cases a good MBI candidate will be ''someone who understands how to operate in a small business. Fewer keen but unworldly big company people can make it work, but, for those who have established credibility, it is very easy to raise money.''

He is referring to the Millards, Creschnicks, and Wellses of this world; serial entrepreneurs able to work with businesses and backers and interested in future capital growth rather than securing a handsome and well-insulated remuneration package. It is likely that a venture capital group, which could be independent or part of a bank or larger institution, is in touch with such people and could steer them your way.

However, you will probably have to put the feelers out first. Simon Lord, head of private equity for Altium Capital in Manchester and a former director of Clearwater Corporate Finance, says, ''corporate finance houses don''t spend much time doing proactive searches for MBI candidates, until a business comes up for sale.''

He finds that ''venture capital groups are becoming lead investors, rather than taking minority stakes. They are sourcing people to lead the deals.''

Structuring the deal
Lord, who admits his first ever MBI ''went bust in 18 months'', agrees with other practitioners that finding the right person with the right experience and culture is the key to success. But after that comes the financial structure of the deal.

Levett says the average deal backed by Northern Venture is worth between £5 million and £10 million. ''We put up half of that and the debt/equity ratio in a deal is usually 50/50.

As vendor, you will almost certainly have your initial sale price hopes cut back to some extent, another reason perhaps for keeping a remaining stake in a BIMBO. The amount the venture capitalist or other backer will want to take varies.

Marriott Harrison''s Innes argues that a buy-In team usually takes 60 per cent of the equity with 30 to 35 per cent going to the venture capitalist or other backer and any remainder going to existing management. However, in the case of the TRACS deal, the new management will have less than 20 per cent.

Due diligence, checking on a company''s finances, including its pension liabilities, can take three months. Then, of course, you must provide warranties, financial and legal, to back up your claims for the business you are selling.

Practitioners say financial warranties usually cover a period long enough to include two regular audits, while legal, warranties can last much longer. Buyers can sometimes take out warranty insurance, but it can be costly.