Raising Finance

What core materials are needed to manufacture a successful MBO?

7 min read

08 May 2015

Richard Belsey, senior associate at law firm Wedlake Bell, gives us his tips on the key components that go into a management buyout – touching on commercial viability, a strong management team, eliminating risk factors and trusted advisers.

Just a few weeks ago Richard Lee, managing director of Jablite, successfully led the £26m management buyout of the business from its European owner Synbra

Jablite manufactures expanded polystyrene (EPS) for retail packaging and construction in particular. Richard was joined by three of his management team and attracted a £5m equity stake from Mobeus Equity Partners. Following the management buyout (MBO) Jabilite has become one of the UK’s largest manufacturers of EPS and hopes to target future growth as UK construction levels increase. 

This is a real success story; SMEs like Jablite are the real life-blood of the UK’s economy and contribute significantly to its growth. But what is an MBO, and what are some of the core materials needed to manufacture a successful MBO?

What is an MBO?

An MBO is an acquisition of an established business led by its management team and usually backed up by external funding, which is often received from private equity or venture capital investment and/or debt financing (or sometimes a combination of the two).

According to the Centre for Management Buyout Research, the value of UK buyouts rose to £16.9bn in 2014 and remains the most active in terms of value and volume in Europe. The buyout market in the UK has continued to make good progress in 2015, yet levels remain significantly below the market peak in 2007.

An MBO provides management buyers with the opportunity to own and grow the business with a relatively small initial investment how they want, together with the financial support of a funder over a number of years. This may appear affordable at the outset, but care should be taken at the point at which a funder ultimately exits the business (often at a premium).

An MBO usually allows its owners a swift exit and (in the sale of a family business in particular) may give some comfort that the culture they established over the years will remain (as it will continue to be run by ongoing management). However, given that an MBO is ultimately an exit and the owners will of course have their own agenda as to the operation of, and priorities for, the business. 

What core materials are needed to manufacture a successful MBO?

(1) Commercial viability

Despite knowing the business and its sellers well, management buyers must have a clear idea of the value of the business and that it has (or will have) a good track record of profitability. This also allows the management team to prepare a detailed and considered business plan, which is the driver behind a successful MBO. By demonstrating complete understanding of their unique selling point, the market in which they operate and clear and structured future plans for growth, the management team (and their funders) can determine the commercial viability of their MBO.

(2) Strong management team

The strength of the management team is vital. Funders pay close attention to the skills, experience and credibility of the management team they are backing, together with their ability to grow the business. Usually MBO management teams have already been running the business on a day to day basis for some time with little or no assistance, but the exit of any family management needs to be kept in mind and funders may choose to fill in any gaps with external candidates.

Read more about MBOs:

(3) Eliminate risk factors

Eliminating and managing risk in the business maximises its value. This is equally as important for the sellers, so that they obtain an attractive price upon sale, as for the management buyers, so that they can hit the ground running as they take up ownership.
If management establishes and continues to develop good business practices and governance procedures prior to the MBO, this ensures less last minute housekeeping and a smooth transaction process.

Even though the management team already know the business well, carrying out rigorous legal and financial due diligence gives them (and their funders) the opportunity to check that everything is in full working order and provides them with further confidence in the business. This due diligence may be undertaken by the target business before detailed negotiations for the MBO are entered into.

Key areas to focus on include:

  • Up to date accounting records
  • Legal ownership structure and up to date company records
  • Formalisation of material agreements and arrangements with key suppliers or clients
  • Ownership and usage of business property
  • Formalisation and protection of key assets, in particular intellectual property
  • Financial and tax management

(4) Trusted advisers

Being surrounded by a team of trusted advisers (corporate finance adviser, lawyers and financial/tax advisers) from an early-stage arms management teams with an informed, independent, secondary opinion so as to maximise their chances of success. It also helps them structure, negotiate and document the MBO in a manner that is commercially viable (and ideally advantageous from a tax perspective). Crucially, the trusted advisers will also work together to project manage every stage of the MBO process so as to ensure management’s time is spent where it should be – on running the business.