In 2013, John Reynard diagnosed the need for a new direction at medical device consultancy Creative Medical Research. Reynard, who founded the firm in 2000, felt it was time to take on new challenges and believed a management buy-out (MBO) would be the best way to keep the business healthy.
“Because of my age, I was starting to think about company succession,” Reynard recalls. “I liked the idea of an MBO more than a trade sale as I wanted to hand it over to people already steeped in the company ethos.”
Following negotiations and advice from corporate financiers the multi-million-pound deal got over the line in 2014 with the MD taking control. Reynard departed with no stake or non-executive role and began work as a business coach.
According to The Centre for Management Buy-Out Research there were 416 MBOs in the UK in 2016, down from 425 in 2015.
Sue Green, director at Watersheds Corporate Finance explains, as a percentage of total deal flow, MBOs have not significantly increased in recent years.
“SME owners in particular overlook MBOs,” she says. “They perceive that a trade sale, usually to a competitor is the only option. They feel that their management team is not up to the task of running the business or would not be able to raise the cash to do the deal. This comes from naivety but also the belief that having built their business from scratch, the management team might not have the stamina.”
However, Green says an MBO provides many benefits to owners. “Trade buyers won’t just knock on your door. You have to do time-consuming and often expensive marketing and due diligence,” she states. “In contrast your management team knows your business well so the process is simpler.”
Green often encourages owners to think about MBOs as it is they, rather than managers, who tend to initiate them.
“We tell them to quickly determine whether a deal is viable,” she says. “What would the structure be like, how much money would have to be raised and how much cash would the management team put in? Are they willing to take the risk? You don’t want this dragging out because it could be damaging to relationships and the business.”
Reynard agrees that owners need to carefully assess whether their business is ready. “To consider an MBO the business needs to function smoothly without the daily input of the existing owner. Clients need to have confidence their needs will be met and the business needs to have sufficient financial resources to sustain a period of transition and pay the legal fees,” he explains.
Owners also need to consider the emotional implications.
“If the management team approaches an owner they could feel honoured. It is an appreciation of what they have achieved,” he says. “However, if the owner is not minded to sell then they have to carefully explain the reasoning behind that. It will be received as a rejection and could result in the demotivation of management.”
Even if the go-ahead is given owners must be prepared for feelings of uncertainty.
“I remember feeling fear. Rationally I knew it was time to move on but the absolute finality of no longer having a responsible role caused me to panic internally,” he explains. “Questions arose like ‘Who am I now?’ and ‘What is my value to the world?’”
After a sale, and if the owner is still not completely resolved about leaving or has a remaining stake in the firm such as holding shares, being a chairman or consultant, they may resent the changes the new team introduce.
“They could become judgemental and critical and say things that undermine the confidence of the new management team,” Reynard says. “If the former owner can let go and allow the new management to make their own decisions this will reassure and inspire them.”
In short, he believes owners must maintain cordiality. “It’s difficult because negotiations can get fraught and the aftermath can be tense but with skilful handling this can be avoided,” he says. “I would certainly do it again.”
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.