Monday, 22 October 2007
Management Buyouts - Gullibility Personified?
I was looking through 'incoming' on Feedburner yesterday and noticed an interesting search that was asking about the advantages and disadvantages of management buyouts.
Having had hands on experience of such an adventure I'd like to share some of the insights and experiences I had. I certainly don't intend to offer any prescriptions i.e. 'you should' or 'your must' I simply want to place these experiences before you and you can take from them what you will.
You probably know that a Management Buyout is a route by which the existing management team can buy a 'business sub-division' off a group partner or owner who has decided that the business no longer fits with it's commercial ambitions.
In the late 1980's I was part of a team of 5 who raised £32m to buy our business off its owner. We all thought this was a wonderful opportunity to make money and, following extensive due diligence, grounded strategy making, detailed commercial planning , and faith in our track record...we signed on the dotted line at 4.00a.m. at a posh solicitors in London.
Management buyouts are seen by the 'buyers' as an opportunity to fulfill their destiny, put the things right that were wrong with business, and .......crucially make an exit (trade sale or flotation) for a profit.
Having a viable 'exit' strategy is the first thing on the plan...and like the rest of plan it has to be realistic and achievable.
In our case the 'next year we'll all be millionaires' scenario didn't work out as we envisaged, and after 8 (instead of the typical 4 year) lending horizon, the lending banks got fed up and did a 'fire sale' of the business--- despite the turn over averaging £25m and net profits of £3.5m. How did this happen?
a) We overpaid for the business, desire to own the company we loved coloured our judgement. This meant that the financial covenants were always going to be demanding.
b) We got hit by 'uncontrollable, unexpected external factors (N.Rock eat your heart out). Interest rates soared to 15% and 25% of our turnover was lost as a key overseas market declared our products 'illegal'!!
c) Unable to meet covenants we re-financed which handed the banks effective control of the business, and although we were lucky they were supportive they eventually had to make commercial decision to suit themselves
d) We couldn't float as we were too specialised...so no exit there
e) we weren't able to make a trade sale... our asking price was too high...and there was board disharmony regarding 'how' we should sell ourselves (deep and dark that one!)
Now...you have to ask why do parents/ partners want to divest? is it because of some honourable sense that business doesn't fit the portfolio?...of course not! it's for one of two reasons...the business is a strategic problem...either unprofitable or in a strategic cul-de sac...or there is no prospect of making a trade sale other than to the management (a potentially gullible management team at that)Keep your eyes on Virgin Stores over coming months.
The allure of a management buyout, the kudos down the golf club are all tempting reasons. However I would urge caution. Often the price you pay is for the 'good-will' but think...where does this come from...if the senior team have created it and manage it then why not simply start on your own??? OK you might want the plant and I.P assets, but buy these prudently - remember you are in a negotiation not a sweet shop! What do you 'really ' need?
Another case I'm familiar with is in the Sports industry - badminton shuttlecocks - to be precise. The management team (proud of their technical capability) bought out their manufacturing business to compete in a globally competitive market place. They believed that their technical and manufacturing skill would win them business. Regrettably their cost base would never compete globally and they 'missed the point' in terms of 'need' when it came to quality. The exacting standards they produced were simply not needed by the mass market and so they priced themselves out.
The parent company had 'seen' these difficulties for the business, and decided to 'get-rid' to a willing and naive management team.
So, to contradict myself, my advice would be...take off the rose coloured spectacles, turn the chess board around and look at the position form the sellers point of view, buy cheap, and don't gullibly believe that your passion, innovativeness and dedication will win the day. There are some big hairy monsters out there!
And finally...you might do no worse than considering the following
Common Money Mistakes before you cough up the dosh for that buyout!