Cambridge Caledonian

Succession by Management Buyout

Securing succession is a big issue for all business owners.  One could sell to a trade buyer, but a Succession Buyout (I suppose this is an SBO but I feel there are too many three letter acronyms in this business already) is an increasingly viable and popular alternative.  This involves selling to the rest of the management team.  Here's five reasons why you should consider one.

1. You'd like your successful independent business to continue beyond your retirement.  This is most likely if you sell to your team.  A trade sale might lead to big changes in the company.
2. Tax efficiency; the deal can be structured to mitigate your tax liabilities, and can be tax beneficial to the MBO team.
3. Rewarding management.   You've worked with them for ages and you want to give them their chance.
4. Customisation: as a “friendly” deal it can be tailored closely to your personal objectives.  You could for example withdraw from the business in stages both financially and operationally.   
5. Funding, finance for SBOs (oops sorry used the acronym) is available from banks and equity providers.  Vendor finance often forms a significant part of the funding if the vendor is to retain some involvement in the business for a period.
   

Is your business suitable for a Succession Buyout?  Provided it is profitable, and you can reach a suitable valuation, the answer is probably yes.    As you will see from my last post we have just completed a succession buyout, and we have two more in the pipeline.

Bourn Bioscience Buyout

Another completed transaction.  PEM Corporate Finance were lead adviser to the Management Buyout of Bourn Hall from Serono.   Bourn Bioscience as it is now called trades as ‘Bourn Hall Clinic’, the world’s first in-vitro fertilisation clinic, and as ‘LCG Bioscience’, offering clinical research and development services to the biotechnology and pharmaceutical industry.

  Apart from the high profile of the business the deal was noteworthy for the speed with which we had to put it together.  Only around six weeks elapsed from signing heads to completion, with completion just before christmas.  Much more detail on our website.  Thanks to many but especially Tom Pickthorn and his cast of thousands at Mills & Reeve,  and to Nick Baker at Barclays.

Photo Caption (left to right): Mike Macnamee - Chief Executive Director, Bourn Hall Ltd. Tom Pickthorn - Partner in Finance Corporate Team, Mills & Reeve. Nicola Graver - Human Resources Director, Bourn Hall Ltd. Neil Burton - Senior Solicitor, Mills & Reeve. Lake Falconer - Partner at PEM Corporate Finance LLP. Dawn Wilkerson - IT and Core Services Director, Bourn Hall Ltd. Lisa Gibbons - Clinical Research Director, Bourn Hall Ltd and Simon Barton - Finance Director, Bourn Hall Ltd.

The role of the lawyer in a Management Buyout

In a typical Management Buyout the Corporate Finance adviser gets involved well before any deal happens, and often prospectively when no deal ever happens.  This is typically with a fee at risk - i.e. no deal no fee.  In contrast the lawyers get involved towards the end and with much less risk.  However they do do huge amounts of work at this stage - especially if its a complex deal that must be done speedily. 

I completed such a transaction before Christmas - PR to follow - and thought this photo of the completion meeting illustrates well the volume of work the corporate lawyers do.  They are shy retiring folk and I promised not to mention them by name in this blog - but they know who they are!  This MBO was complicated and the completion agenda had approx 90 documents to be executed in the right order.  They're shown lined up in three rows on a long table in a London lawyers office.

8 Steps to an Management Buyout

I recently attending an excellent presentation skills talk from Andy Bounds of Abnormal Results.  He offers is a free 37 minute consultation.  Why 37 minutes?.....well who would remember a free one hour consultation.  Everyone remembers the quirky 37 minute consultation.   

With that in mind I have come up with 8 steps to a successful Management Buyout.  37 would be far too many.  Why 8?  Why not?  A quick googling tells me that in numerology 8 represents hard work and lessons learned through experience, and more than any other number, eight seeks money and material success.  Doubt if I believe it, but it seems appropriate!

So here they are:

Step 1 - Assess the opportunity. Be confident in your decision and if you have any fundamental doubts about doing an MBO - don’t do it. You will typically have to invest the equivalent of one years gross salary in the deal. You can borrow this relatively easily, and can usually increase your salary to cover the interest costs; but you will still be expected to take the capital risk. This is generally thought to be the level at which you will be fully committed to the business but still able to sleep at night.

Step 2 – Assess the Viability of the deal - Work out how the business can grow and make money. You don’t have to have a growth plan to do an MBO but it certainly helps and will allow you to grow the value of your shareholding.

Step 3 - Create a credible business plan. This must have a good executive summary as financiers DO make quick decisions.  It should also show that you have a firm idea of what you will do once the deal is done. A good plan can form your initial budget for running the business, a poor one will sit on the shelf.

Step 4 - Reach agreement with the seller. Usually you will want to avoid doing this negotiation yourself as it can become fraught. It is useful to have an adviser to be the “bad guy” and negotiate on your behalf.

Step 5 - Raise finance. Whether its venture capital and banking, or just banking you should allow plenty of time to raise finance. This is about getting the right deal, but also you are selecting a business partner – especially if you are raising outside equity – and its important to go down the aisle with the right one.

Step 6 - Kick the tyres. Do some purposeful due diligence on the areas where you need financial comfort. This might be elements of the business you have not managed if the owner, or a group headquarters have handled some aspects of the company’s affairs. Your financiers will also want due diligence to support their process.

Step 7 - Close the deal. If all goes well you will be drinking champagne in the solicitors office. Enjoy it while you can, for now you will have to get down to the real work.

Step 8 - Build the company. It’s all yours now, if you have bought at the right price, properly funded its an opportunity to run your own ship, and build real value in your shares.

And of course get yourself a good adviser who has been through it before.

Telecomms Technology MBO

At PEM Corporate Finance we advised on the recently completed Management Buyout of Cambridge based telecoms technology company C3 Limited. 

C3 develops communications platforms and applications to automate call-handling.  Its products  are designed to meet the mass calling requirements of large corporates, service providers, network operators and the public sector. They are PC based, run under Windows NT, use MSSQL and are SNMP compatible.  Customers include Vodafone and O2. 

C3 equipment is used to support TV phone ins, monitoring lone workers, and helping loved ones keep in touch with troops abroad. 

An interesting company in an buoyant sector; we were pleased to help Wayne Starsmore and John Wood to acquire the company.

Have a look at the full press release at Cambridge Network or on our site.