To buy-out or not to buy-out?

That is the question.

Many managers considering an MBO do not realise the dangers that lie beneath their appeal.

Many enthusiastic managers considering a management buy-out do not realise the dangers that lie beneath their otherwise glossy appeal. One of the largest problems stems from the differing views of the word ‘success’.

This is particularly pertinent where involvement of a target-driven venture capitalist is concerned. A VC focuses on maximising a quick return on their investment, whereas the diligent manager will be largely concerned with longer targets and the need to do the right thing. For many smaller companies, the managers will be running the company for the first time, with their business plan under their arm. Matched against the experienced VC, the expectations of a new owner-manager can seem to be somewhat below the hard and fast demands of a VC.

A danger then may be for owner-managers to succumb under the pressure and make irrational decisions as to where to take the company. Coupled with emotions and excitement, there is a possibility of it all ending in a less than satisfactory outcome, falling far short of the high expectations pinned on the MBO.

A potential owner-manager needs to seriously consider whether they wish to manage their own business or an entity that could potentially be disguised as a wolf in sheep’s clothing. The sensible advice concerning any acquisition is that if the deal does not stack up, the managers need to be able to make a level-headed decision to walk away, rather than to go ahead and make a gruesome discovery post-completion. There is a need to balance the risk-reward exposure through adequate disclosure. There also needs to be a provision of comfort from the sellers during the course of the transaction.

It is not all doom and gloom though. In a management buy-out involving a VC, the level of participation that the VC is likely to require can form a welcome relief. In connection with the investment, such participation may enable the company to make the transition to the next level. This can also provide a reassuring support mechanism to the new owners.

By keeping one eye on the common goals and one on the trade aspects of customers and contracts, the dangers can be converted into a profitable relationship.

By Danos Swain, an associate at Thomas Eggar and Hayley Bevis, a solicitor at Thomas Eggar.

Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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