Increased MBO activity
Almost 100 UK companies were bought out by their management team last year – an increase of almost a quarter.
There were 91 management buyouts in the UK in 2017, compared with 76 in 2016. Pizza Hut, travel firm Holiday Extras and data analytics firm Simpson Associates are among the companies to have undergone management buyouts this year.
But what is a management buyout, why do they occur, and why might they be becoming more common?
What is a management buyout?
A management buyout is when a business is bought by its management team. This might simply happen because the owner wants to retire or take a back seat. Or the company might be splitting into smaller companies, or it might be in trouble and the buyout is an attempt to rescue it.
What are the advantages and disadvantages?
The advantage of a management buyout is obvious for the people doing the buying: it lets them run the business and reap the financial rewards there from.
But as an alternative to an external sale, provided the new owners know what they are doing, a management buyout is good news for everyone else too, as the company carries on in the hands of people who know, understand and care about it. Employees and clients get continuity, with no fears over job losses. It also means the company doesn’t have to risk disclosing sensitive information to potential buyers, who might also be commercial rivals.
However, the management team have to make the transition from being employees to owners, which requires a change in mindset from managerial to entrepreneurial – and that isn’t necessarily a given. They also usually need external finance to fund the deal, whether that’s a bank loan, possibly secured on personal or business assets, or private equity, with all the risks that come with that.
Customer relationship marketing agency Armadillo underwent a management buyout in February. Chief financial officer Andy Brown told www.growthbusiness.co.uk: “The founding directors took the decision to increasingly step back from the day-to-day running of the business. With them owning the vast majority of it, it was becoming more and more difficult to achieve complete unity across decision-making.
“I believe the transaction has been a success for all parties, with the founders realising a significant return for their asset, and the new owners having more control and ability to make decisions more quickly and unencumbered.”
Why has there been an increase in management buyouts?
First, it’s important to remember that these figures are only for one year; shortly before that, www.financialdirector.co.uk was reporting a fall in the number of management buyouts.
A likely reason is that the UK economy is simply doing well: it grew by 0.6 per cent in the last quarter, compared with 0.4 per cent growth in France, a 0.2 per cent decline in Germany and a 0.3 per cent shrinkage in Japan. In contrast, in the aftermath of the financial crisis ten years ago, funders were less keen to invest and business owners wanted to wait to sell until they could get a better price.
Another contributor is likely to be the fact that there is an abundance of funding available, both from private equity firms and lenders – in September, www.growthbusiness.co.uk reported that private equity firms had around £1 trillion of unspent money looking for a home.
If you’re thinking of selling or buying a business, you’ll probably know by now that it’s about more than just rules, regulations and figures – any accountant can help you with that without much trouble. We go further, working with you to help you get the best outcome possible – not just for you, but for staff, shareholders and everyone else involved. And as chartered accountants in Tunbridge Wells and London, we deal with business takeovers of all shapes and sizes. Call our M&A specialists Janet Pierce or Charlie Goss at our Kent office on 01580 313108.
