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Mergers and Acquisitions Best Practice

MBOs: A High-Octane and Life-Changing Mode of Business

by Andy Nash

Table of contents

Executive Summary

This article is aimed at prospective managers of a management buy-out (MBO).

  • MBOs are inherently risky, with a relatively high failure rate.

  • It’s the leverage in the deal structure that makes success so rewarding. Unfortunately leverage works just as impressively in reverse!

  • Every year around 600 deals will be completed, and every year broadly that number will reach the exit stage. Unfortunately, one of the most common “exits” over the last 20 years has been receivership!

  • Research, good advice, and planning will increase your chances of success

  • You can increase your chances of success by knowing what the common elephant traps are.

  • Setting out on an MBO without the best advice and support you can muster is akin to walking blindfold through a minefield. You have been warned!

MBOs: The Beast Explained

MBOs—shorthand for MBIs, BIMBOs, IBOs and the like, as well as management buy-outs—make or lose fortunes for the risk-takers because of the leverage involved. Leverage is the fulcrum on which these deals seesaw between success and failure. Every venture capitalist’s portfolio has a range of leveraged companies, and average returns to their investors are determined by the balance between their star investments and those which stagnate or go bust. Leverage is a business school type word—my eldest daughter would probably say it was cool! If your company were an automobile, leveraging it would be like filling the trunk with high explosive and then driving off on a long journey with your fingers crossed.

Management buy-outs and buy-ins are a high-octane part of the business world. Since 2001, the most common exit from MBOs/MBIs hasn’t been flotation, or even trade sales, but receivership. It is a high-risk/reward arena. Metaphorically, an MBO/MBI is like fitting an eight-liter V12 engine into an aged VW Beetle and expecting it to perform much better than before.

I’ve worked with twelve MBOs since 1991 in a variety of roles: as chairman, executive director, nonexecutive director, and as a personal coach to a managing director. The experience has varied greatly: from staggering success to the verge of financial oblivion—and fortunately back again. The deals have ranged across very different markets: from the sophisticated world of global drug discovery in mythical Tintagel to heavy-metal bashing (dustcarts) in the West Midlands of England, and from the rarefied academia of international publishing to horticulture in the Welsh valleys. The deals have been backed by many different venture capitalists and financed by UK and international banks.

I have been very fortunate to have seen many MBOs through the prism of management. There are many good books written by academics and professionals that describe the process, structure, and chronology of an MBO. It is important that you understand these topics; however, it’s crucial that you also understand other aspects: where the main elephant traps are; what the key success factors are likely to be; and how an MBO’s chances of success can be maximized.

After 12 deals I have no idea what constitutes “best practice” because I’ve discovered that every MBO is unique. I have reflected long and hard on the lessons I’ve learned on these deals over 18 years, and they are set out below.

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