Why buyers of businesses need support

Mike Wright, Imperial College Business School

Centre for Management Buy-out Research

• Identified emergence of UK buy-out market early 1980s• Organised first European buy-out conference in 1981

• Centre for Management Buy-out Research (CMBOR) • Established in 1986, based at Imperial College Business School

since 2011 • To examine developments in UK & European buy-out markets in

comprehensive and independent manner• 25 years of research into MBO/MBIs

• Established world leading database of buy-outs• Currently c.30,000 buy-outs in UK and Europe

• Number of publications generated from database including:

• UK Quarterly Review and European MBO Review• Database also used as basis for more detailed research

• Both for academic and commercial uses

Who are the Buyers?

MBO Management Buy-out

Existing Management Main Non-private equity Owners

MBI Management Buy-in

Outside Individuals Main Non-private equity Owners

MEBO Management Employee Buy-out

Existing Management and Employees Significant Owners

IBO Investor-led Buy-out

Private Equity Firm Initiates Transaction; Management Some Equity

BIMBO Buy-in Management Buy-out

Hybrid Buy-in/Buy-out

Smaller PE Backed Buyouts

PE Backed Family Firm Buyouts

Can managers buyout? They already are!!

What qualities are needed?

• Entrepreneurial Vision• Managerial Capability• Tenacity• Commitment• Make money• Team

• Complete and capable team?

• From line-managers to owner-managers

• Firing existing colleagues and finding new ones

• “Tacit” knowledge of the departing founder• How critical? • How to fill the gaps?• Effect on price?

• Employee relations• Negotiating with unions

and HRM

• Business prospects• Ability to

• Grow• Improve efficiency• Turnaround

How can awareness be raised? • Role models of successful deals• Accessible and informative guides

• Private Equity Demystified• Experience of buyout managers

• Informed commentators• Need positive image of buyouts and private

equity• Debate about private equity has been damaging and

misleading

• Courses/seminars• Advisor, Chambers of Commerce, Industry associations,

family business associations: breakfast and evening seminars

• Business school courses/seminars

Where advisors can provide support

• Corporate seller

• Negotiating with Boss

• Is the business for sale?

• Why does the owner want to sell?

• What if the bid fails?

• Risk of being fired?• What does seller

want?

• Family seller• Does family want to sell and you to buy?

• Does family think you’re up to it?• Are there other family bidders?

• What are implications for family?

• Does family want to maximize sale price or keep name?

• ¼ of cases vendor proposed fixed price maximizing valuation

• Access to information on the company?• 2/5 vendors control information

• Role of seller post buyout? [NED?]• Family firm buyouts don’t plan transfer• Only 1/3 plan >1 year ahead; 1/5 don’t

plan

Where advisors can provide support

• PE Firm• Potential conflicts of interest• Equity stakes

• Ownership illusion and covenants

• Is a PE firm necessary?• Which PE firm is most

appropriate?• Can the PE firm add

value?• Conflict of time horizon

of PE and management• Why is the deal attractive to

a PE firm?• What’s the strategy?• Growth, profits from

cost-reduction….?

• Different buyers• MBOs

• Emotion of wanting to own ‘their’ business

• Over-valuation and unrealistic price

• Give away equity and over-leverage

• Risk of failure of the deal• Second mortgages and over-

commitment• Reflecting managerial unique skills

in price?• MBIs

• Asymmetric information• Due diligence challenges

What can government do to support?

• Supportive Capital Transfer Tax regimes• Schemes to support growth and regional

economies should include ownership transfers not just start-ups• MBO performance has held up better during recession

• Promote asset and private equity markets for SMEs

• Government ownership transmission training vouchers