Should you consider a private equity funded management buyout?

For a lot of owner-managers the idea of selling your business to a trade buyer has a lot of risks. Aside from having to share sensitive information with what may currently be a competitor, it can also lead to concerns as to what happens to your management team, company culture, or even your customers. However, you may feel, or indeed have been told that there is no other option. Well there is, in the form of private equity (“PE”).

PE funds are increasingly looking to invest in smaller, but established, businesses. At this level the fund managers recognise that they need to offer not just money, but also expertise in supporting growth. This can take the form of helping with senior level recruitment, developing the business strategy, improving corporate governance and management reporting or assisting with acquisitions.

Many people have heard of “private equity” and are put off by negative headlines. We wrote last year about the difference between the larger, high profile private equity funds that attract the headlines and those that we work with at the lower end of the market (see “Don’t let the headlines scare you off private equity…”).

How does it work?

Owner-managers often don’t consider a management buyout for the obvious reason that your management team don’t have sufficient money to buy the business. PE firms essentially step in to help the management team, and provide the additional capital to fund the deal. They invest alongside your management team and support their plan for the growth of the business.

They structure the investment in such a way that allows your team to take a shareholding in the business going forward by investing whatever they can afford, but doesn’t require them to come up with all the money. This allows your management team the opportunity to generate capital wealth in the future, which is a nice legacy to leave.

PE funds can also offer the opportunity for you, the owner-manager, to retain a small stake in the business which is often an attractive way to stay involved for a bit longer while handing over the day to day reigns.

What are the benefits for a seller?

> It allows you to sell the business without having to share sensitive information with potential buyers who may also be competitors;

> It can often be a smoother process as the PE funds are 100% focused on doing deals;

> Your management are front and centre leading the deal, so your brand and culture are protected as the business continues as an independent entity;

> It gives your management team the opportunity to invest, and drive the business forward to generate their own capital wealth in the future;

> You could choose to retain a small stake, or some involvement, if you wanted to manage your exit in more of a staged way.

And some of the perceived negatives?

> “PE funds don’t understand my business” – PE funds are rarely sector experts, but they are experts in providing structure and support to high quality businesses. They will rely on the management team to know the business and drive it forward.

> “PE funds will load the business with debt” – some transactions do involve raising bank debt, but more often than not at this level they do not. The PE fund will structure some of their investment as loan notes but these will be flexible, as most of the return on investment will come from the equity.

> “PE funds will come in and change everything” – at this end of the market, the transactions are very much about supporting management to take the business forward. While the PE funds may contribute to discussions at board level, the day to day running of the business will be the responsibility of the management team.

What type of businesses are PE funds looking for?

While they are not sector specific, PE funds do look for some common business characteristics:

> A profitable business with a good track record;

> Usually an operating profit or EBITDA greater than £1m;

> At least one strong senior director to lead the business in the future;

> An excellent product or service with a good market position;

> A core base of recurring revenue or customers that provide a good platform for growth;

> Growth opportunities either organic, or perhaps some acquisitions.

As the number of private equity funds increases, there are now more options than ever for an owner manager looking to exit. Private equity isn’t right for all businesses, but it’s worth having the discussion before you start any sale process.

Like to know more?

We have created a brochure for SME owners which gives more background on how private equity works. For a copy please email hello@forwardcf.co.uk.

If you think this could be an interesting option for you we would be happy to discuss how it could work for your business, so please get in touch.