UP TO THE CHALLENGE
Chairman of PKF Corporate Finance Asia–Pacific,
Andrew Jones, says the team needs to be satisfied that
the investment decision makes sense, and that “they’re
not just doing it because the investment has been
presented to them”. They also need the skill set to
run the business in the absence of the owner, who
often possesses unique relationships, knowledge
and institutional memory.
And of course, they must agree on a plan for where
they will take the business – a clear and persuasive
document that will tell funders, employees, suppliers
and customers that they know what they’re doing.
THE OWNER QUESTION
After the plan is hatched, a successful buyout needs a
willing seller. As an investment adviser to clients large
and small, Chris Brown has found an MBO group’s
success is shaped by its relationship with the business
owner. Many MBOs work because the owner no longer
wants the hassle of owning a business, or must sell to
fund another project. And owners who admire their
management group far more often embrace the idea
of a buyout when it is pitched to them, Brown says.
The seller’s initial enthusiasm is just a starting point,
however. Selling owners have often steered the
business for a number of years. During the sale process,
they must reconcile themselves to the reality that the
business will go on without them – that their baby has
left home. Not all are able to do this.
Jones confronted exactly that problem as part
of a buyout group. His initially keen majority owner
began to have second thoughts: “A lot of his own
personal identity was associated with that brand.”
The best sellers, he says, want to step back and are
clear on what they are going to do next in their lives.
SEEKING THE
BEST PRICE
No matter how well the buyout starts, the
owner’s thoughts will likely turn at some point to
the question: is this the best price I can get?
MBOs always invite this question, because the
people with the numbers are also the people buying
the firm. In particular, the owner may begin to
wonder whether management has put its foot on the
profits brake to make a buyout look more attractive to
the owner, or is going soft on the projections.
Does management step back on the accelerator
after a buyout? A survey of academic studies prepared
by the former Melbourne Centre for Financial Studies
(MCFS) in 2009 does not give a simple answer. And
Brown points out that the same set of projections
should be presented to present owner and buyout
funders alike.
But the MCFS study contains a reminder that
where there are non-controlling shareholders, board
members are obliged to ensure the firm is not sold
cheaply. That means a buyout team may quickly face
a rival bidder.A GAME FOR VETERANS
Brown has found that the easiest MBO transactions are
those where the managers buying out the company
have been running it for at least a couple of years
without the owner. PKF’s Jones, who went through
his own MBO experience in 2002; goes even further.
At 31 he was, he says with brutal honesty, “too young
and inexperienced for the role”. He suggests MBOs
are generally a game for managers with at least
20 years’ management experience. Twenty-somethings
may run start-ups, but MBOs belong to 40- and
50-somethings.AN MBO GONE MAD
FOR A PICTURE OF A GIGANTIC MBO GONE SLIGHTLY
CRAZY, READ WHAT WAS ONCE DUBBED “THE BEST
BUSINESS BOOK EVER”. IN BARBARIANS AT THE GATE:
THE FALL OF RJR NABISCO, JOURNALISTS BRYAN
BURROUGH AND JOHN HELYAR RECOUNT THE 1988
ATTEMPT AT A MANAGEMENT BUYOUT OF FOOD AND
TOBACCO GIANT RJR NABISCO. THE ALSO-ACCLAIMED
HBO MOVIE VERSION STARRED JAMES GARNER AND
JONATHAN PRYCE.theceomagazine.com | 119Takeovers | INVEST