What is a Management Buy-Out?

Transcription

1 MBO guide

2 What is a Management Buy-Out? A Management Buy-Out (MBO) is purce of a company by its. Management typically acquire a controlling or significant equity stake a relatively small personal investment. The remaining funds required are usually provided by external parties as a combination of debt equity. In first few of an MBO, cashflows of business are typically applied to servicing repaying debt taken on as part of transaction. Over time, opportunity to deliver a substantial increase in shareholder value both by paying down debt by increasing underlying profitability of business. As an existing senior manager you may be in a good position to bid ownership should current owners be looking to divest all or part of ir shareholding. Typically such a divestment occurs when an owner wishes to realise value in a retirement situation or when part of a business is deemed non-core. An MBO can provide a once in a lifetime opportunity to take ownership of business you manage As an existing business owner, you may already be thinking about an exit strategy considering potential buyers your business. A sale to can provide a number of advantages over alternative exit routes is usually worth including in range of options consideration. If you are a manager aspirations of owning your own business or an existing business owner looking to realise your investment an MBO could provide answer you are looking.

3 Key ingredients success The quality of is out exception most important consideration in any MBO There are four key ingredients a successful MBO, namely: 1. Strong The most important factor in an MBO is. Financiers will need to be confident that that y are investing in have all of attributes to make business successful. The should have all round strength to manage business independently drive commitment to lead grow business after transaction. Leadership is important, but a successful MBO is a joint eft by right mix of managers. A typical MBO would include roles of Managing Director, Sales Director, Operations Director Finance Director. 2. Clear Growth Plan A commercially viable existing business a well-developed growth plan is an essential part of a successful MBO. The business must be capable of operating commercially as a stalone entity a clear vision growth plan. The business will need to generate sufficient profit cash to repay debt sustain business as it grows. Additionally, growth of business will ultimately drive future shareholder value. 3. Financiers/Exit Strategy The will require financial support of investors banks in order to fund transaction. Financiers will want a return on ir investment will often require a suitable exit strategy to achieve this. An early consideration of future exit options will enable to choose financiers a matching exit horizon. 4. Willing Vendor An existing owner will need to have thought about possibility of a sale to to enable an MBO to occur. However, many owners will not have considered a buy-out by until it is suggested to m. It is ree worthwhile understing advantages of an MBO owner, particularly when compared to a trade sale. These advantages include following: Confidentiality - commercially sensitive inmation is not released in wider marketplace; Warranties & Indemnities - given s knowledge of business warranty obligations that a vendor will have to enter into are likely to be less onerous in an MBO; Flexibility - greater flexibility exists to deliver owner s preferred consideration package, which may include an ongoing equity stake in business; Continuity - continuity all stakeholders in business, including, employees, customers suppliers; Deliverability - s knowledge of business means that an MBO offer will often be seen by a vendor as more credible deliverable proposition, being more likely to hold firm throughout any due diligence process; Speed - MBO s can present a more timely completion process, particularly full cooperation of all parties.

4 The MBO Process 1 APPOINT ADVISOR 2 FEASABILITY 3 VENDOR DIALOGUE 6 FINAL NEGOTIATIONS 5 FUNDRAISING 4 BUSINESS PLAN 7 DUE DILIGENCE 8 LEGAL COMPLETION 9 BOARD SUPPORT 1. Appoint Advisor A clear, concise well-prepared business plan underpins all successful MBOs A adviser should be appointed right at start will be fully involved in all aspects of transaction until completion. The adviser will work very closely throughout whole MBO journey. It is ree vital to select an adviser you feel you can work who will provide necessary experience support throughout. The key roles of advisor are to assess feasibility, lead negotiations, introduce financiers, manage production of business plan/financial projections, manage due diligence legal completion processes, deliver value, project manage MBO process ensure transaction completes on a timely basis. 2. Feasibility The adviser will assess at outset wher business meets criteria a successful MBO. This feasibility would encompass a strategic review of business, growth opportunity,, stalone financials, any taxation implications an early assessment of potential financiers. Although financial structure will evolve throughout process it is important to consider at an early stage a rough outline of potential transaction structure to underst wher proposed transaction valuation will be both viable fundable. It is crucial to underst wher an MBO is at least feasible bee entering into detailed discussions vendor. 3. Vendor Dialogue Without a willing vendor transaction will not happen so a suitable approach should be made early on in process. It will depend on individual circumstances as to wher it is appropriate adviser or to approach vendor. It is important that se discussions are hled carefully that a clear effective dialogue is established vendor from outset. Heads of Terms are usually entered into between vendor once broad agreement been reached on transaction parameters. Most of terms set out are not legally binding. However y provide clarity demonstrate commitment to enter into a legal agreement on specified terms ree should be considered negotiated carefully. This document would also make reference to sensible period of exclusivity during which MBO process can be completed. 4. Business Plan The business plan is an important document its main objective is to help raise. A well-presented business plan is also a key factor in securing funder confidence in business. The business plan is thus primarily a sales document should demonstrate s commitment to MBO. Management must take full ownership of business plan financial projections, but usually adviser will give guidance will critically evaluate business plan bee it is circulated. The business plan is usually 15 to 20 pages, sections covering an executive summary, business overview, market summary,, growth plan financial projections. Detailed financial projections (usually appended to business plan) need to be presented over a three to five year period, in a monthly profit loss, balance sheet, cash flow covenant analysis.

5 Striking right balance in deal funding structures is critical to short, medium long term prospects of MBO 5. Fund Raising Armed a business plan advisers will identify select a limited number of potential financiers that are well suited to invest in transaction, based on capital required, financiers prior track record financiers appetite such a transaction. It is critical to establish a working relationship compatibility between financiers. The is usually expected to contribute a relatively small amount, majority of funding coming from a bank /or a venture capitalist. The owner may also provide part of funding by leaving money in eir as a loan note /or as a reduced equity stake going wards. Funds raised will be used to pay purce price of business, provide working capital to business post-completion cover professional costs of transaction. Funds Required (Deal Structure) Purce Price Liquidity Line Costs Financed By (Funding Structure) Bank Asset Finance & Leveraged Debt Vendor Deferred Consideration, Loan Notes & Equity Rollover Venture Captital Mezzanine Debt & Equity Man. Equity 6. Final Terms Following presentation of business plan financial projections lead adviser will typically seek to negotiate agree final terms on behalf of selected bank venture capitalist. This will also usually coincide a reaffirmation agreement of final terms vendor. The key objective of this stage is to agree all material terms all parties, subject only to due diligence legal completion 7. Due Diligence MBO due diligence is typically more straightward given s existing first h knowledge of business. However, it remains necessary as financiers will require a level of independent scrutiny to ensure that re is nothing that contradicts ir understing of current state potential of business. The individual elements of due diligence process may include commercial due diligence, financial due diligence legal due diligence. 8. Legal Completion It is common each of parties (bank, venture capitalist, vendor) to have separate legal representation. The are a number of legal agreements between all se parties, all of which need careful attention. Competent experienced lawyers will maximise protect value contribute towards a timely completion process. There is a considerable amount of legal documention involved when all is finally signed it s usually time a well-deserved glass of champagne! 9. Board Support Managing business effectively must become top priority immediately after legal completion, typically an initial focus on a 100-day plan. The venture capital investor will probably want to appoint a representative to Board of Directors, toger a suitably experienced independent Chairman. The selection of Chairman will usually be a joint process between venture capital investor, typically occurring in first couple of months after completion. The focus all shareholders is n delivery of ir business plan - when real work begins.

6 Timetable & Transaction Costs An MBO usually takes between three to five months to complete, depending on complexity of transaction position taken by various parties in transaction. An illustrative timetable is outlined below: Day Appoint Advisor 2. Feasibility 3. Vendor Dialogue 4. Business Plan Financial Projections 5. Fundraising 6. Final Negotiations 7. Due Diligence 8. Legal Completion 9. Board Support An MBO typically takes three to five months to complete The new company established to undertake MBO will settle all transaction costs on legal completion of transaction from raised. Additionally, most transaction costs will be on a contingent basis (being dependent upon a transaction successfully competing) reby ensuring exposure of is minimised should a transaction not occur.

7 MBOs can provide opportunity to significantly increase shareholder returns in a short period of time Potential Investor Returns It is worth remembering that all parties enter into a buy-out because y expect to gain something from process. The main reason s undertake MBOs is to gain independence autonomy, a chance to influence future direction of company to make a significant capital gain from a relatively modest personal investment. The realisation of value financiers will largely depend on exit of business. An exit will usually be achieved through a sale of company to a trade acquirer, flotation of business, sale of business to an institutional investor or may buy-out venture capital investors through a secondary buy-out. An illustrative transaction structure: This analysis assumes business is acquired an overall enterprise value/ consideration of 20.0m, being d by bank debt of 10.0m, vendor loan notes of 3.0m, venture capital investment 7.5m a investment of 0.3m. For ir investment, venture capital investor receives a 40% equity stake in company, receiving a 60% equity stake. Completion Date During Transaction Year Four Funds Required: Enterprise Valuation / Consideration 20.0m 40.0m Transaction Costs 0.8m m 40.0m Financed By: - Bank Debt 10.0m (8.0m) 2.0m - Vendor Loan Note 3.0m (2.4m) 0.6m - Investor Loan Note 7.3m 7.3m - Investor Equity (40%) 0.2m 12.0m - Management Equity (60%) 0.3m 18.1m 20.8m 40.0m Note: The above example does not include any vendor equity participation which could also provide a source of funding Within this analysis it been assumed that after four business doubled its earnings, resulting in an enterprise valuation/consideration of 40.0m. Over this four-year period business also repaid a substantial amount of bank vendor loans from operational cashflow generated. After assumed exit at end of year four, se proceeds would first be used to settle any debt business holds: being bank debt of 2.0m, vendor loan notes of 0.6m venture capital loan notes of 7.3m. The remaining consideration would n be split between equity holders: being 12.0m venture capitalist 18.1m. Under this scenario proceeds received by venture capital investor would be above 2.5 times ir original investment s initial investment of 0.3m would be worth 18.1m. This appreciation in equity value is highlighted in graph below. Company Instrument Value ( m) Bank Debt & Vendor Loan Note Repayment Venture Capital Loan Notes Management Team Equity Venture Capital Equity Year 1 Year 2 Year 3 Year 4 Time Appreciation in Equity Value

8 -Led Advi throughout transa Champion throughout transa Champion Role of Isca Ventures Isca Ventures are experienced in all aspects of delivering successful MBOs. When choosing your adviser we recommend you consider following key attributes of Isca Ventures: Unique blend of Board Director experience, in numerous successfully completed MBOs; Independence ensures no conflict of interest our clients or vendor; Impressive track record of transactional success provides our clients an early endorsement ir business, growth financial plans; -led advice throughout transaction will maximise prospect of a successful completion; Long-sting relationships a range of potential financiers will ensure you attract right s; Success orientated transaction costs assures you that we are willing to be judged by our results. This guide provides a generic overview of an MBO. For additional advice relating to your business, we would be delighted to meet on a no-obligation basis to discuss your circumstances in a more personal manner. Please don t hesitate to contact our. is an experienced practitioner, a big four, Plc international background. & Young held senior ir s in UK a Australia. is anin experienced practitioner, big four, More Plc latterly been part of three buy-outs a level international background. & Youngat held senior exited se after a 24m company sale, AIM stoc in ir s in UK a 131m Australia. More is an experienced practitioner, big four, Plc market flotation a part secondary buy-out. is buy-outs currently at a non-executive latterly been of three a level international background. & Young held senior two region. exited se after a 24m company sale, AIM stoc in ir s in UK a 131m Australia. is an experienced practitioner, four, More Plc mchampion@isca market flotation secondary buy-out. is buy-outs currently a big non-executive latterly beena part of three at a level international background. & Young held senior two region. exited after a 24m AIM stoc inse ir scompany in UKsale, 131m Australia. More mchampion@iscaventures.co.uk mchampion@isca market flotation secondary buy-out. is buy-outs currently a non-executive latterly beena part of three at a level twose after aregion. exited 24m company sale, 131m AIM stoc market flotation a secondary buy-out. a non-executive mchampion@isca is onetwo of most well respected advisors in region. region, over thirty experience. Prior to jointly mchampion@isca founding IscaofVentures, was responsible establishing directing is one most well respected advisors in & lead advisory in Prior south-west regio region, over thirty experience. to jointly Bee thisisca roleventures, held senior in NatWest s founding was responsible establishing directing oneus. of most well respected advisors in UK&is alead non-executive four advisory in south-west regio region, over experience. Prior to jointly - thirty region turnover from 12m to 206m. Bee this role held senior in NatWest s founding IscaofVentures, was responsible establishing directing is one most well respected advisors in screbo@isca screbo@iscaventures.co.uk UK& US. alead non-executive four advisory in south-west regio region, over thirty experience. Prior to jointly region held turnover from 12m to 206m. Bee this role senior in NatWest s founding Isca Ventures, was responsible establishing directing screbo@isca US. non-executive four UK& alead advisory in south-west regio held turnover from 12mNatWest s to 206m. Bee this region role senior in UK US. a non-executive four screbo@isca region turnover from 12m to 206m. is a well known advisor, a career incorporating big-four wider practice experience. is a screbo@isca twenty experience, is a well known advisor, a career including that big-four gained experience., more incorporating wider&practice is a latterly, as responsible inexperience, a medium size twenty is a well known advisor, career manage geggleton@iscaventures.co.uk firm. enjoys building long term relationships a owner including thathe gained, more incorporating big-four wider& practice experience. a as lead adviser responsible managed in sizeis from 1m tosize latterly, as in a medium twenty experience, is a well known advisor, a owner career manage 100m. geggleton@isca firm. enjoys building long term relationships including thathe gained, more incorporating big-four wider& practice experience. a as lead adviser responsible managed in sizeis from 1m tosize latterly, as in a medium twenty experience, 100m. geggleton@isca enjoys building term relationships owner manage includingfirm. thathe gained &long, more as lead adviser responsible managed size from 1m tosize latterly, as inin a medium 100m. firm. 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Isca Ventures LLP provides independent specialist had a particular specialism in private equity backed working advice, encompassing company sales, extensive roll-out plans. retail a nonmeves@isca s@isc executive at four region. fundraisings acquisitions. Isca Venturesbuy-outs, LLP provides independent specialist For more inmation regarding services we offer, our advice, encompassing company sales, meves@isca s@isc we have completed over buy-outs, fundraisings acquisitions. 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9 Isca Ventures LLP Bath Office: Waterhouse, Waterhouse Lane, Bath BA2 7JB Exeter Office: Innovation Centre, Rennes Drive, Exeter EX4 4RN London Office: 90 Paul Street, London, EC2A 4NE Inmation in this document is intended to provide only a general outline of subjects covered. Isca Ventures LLP accepts no responsibility loss arising from any action taken or not taken by anyone using this material.