Ask the Expert with Lee Humble: Management buyouts – is now the time?

Lee Humble, our Corporate Finance Associate Partner, looks at the emergence of Management Buy Outs in the M&A market.

The M&A markets have shown significant deceleration during Q2 of 2020 with COVID-19 and the resulting lockdown measures causing the pause or the collapse of a significant portion of transactional activity. As we trade through Q3 however, markets have seemingly re-activated and movement is gradually picking back up. The re-emergence of cash rich equity investment houses is a key aspect of this, as well as the reassessment of business plans across both the SME and large company markets.

Management buy outs are now becoming a hot topic of conversation with large groups looking at their organisation structures and assessing what is essential to underlying activities and which aspects of the group are now perhaps unneeded or unwanted. Large groups are also looking at means to address any liquidity concerns, with the usage of share placements or government-backed schemes, as well as the disposal of any such non-core business assets or divisions which may have posed a distraction or a longer term liquidity conundrum for management.

Management teams across the UK are therefore in a position whereby a buyout may present itself, often at a valuation point, which is more conducive to the deal taking place. Should you find yourself in that position it is essential to take stock of the opportunity and assess both the merits and risks.

A key benefit is that the management team know the business well and understand the true value drivers and issues which lurk across each quarter of the business. This provides for a more informed assessment as to the viability of a buyout whilst also providing a degree of continuity during and after any transaction. In a period of intense volatility, management team’s should therefore assess the ongoing risks to business trade with key focus on the behaviour and viability of both supply chains and customer bases, as well as the impact of removing the anchor of a large brand or group which sits behind the business.

Assuming the risks are palatable, management teams must then assess the valuation expectation of the ultimate owners. Key to this will be:

  • how much do they value the business and how much will they sell for?
  • over how long of a period will the owner accept payment?
  • what critical infrastructure will be needed from the owner’s post completion?
  • how will suppliers and customers respond to a change of ownership?
  • if a buyout does not proceed what other options are available to them?

The questions can be endless but in the current market buyers hold a lot of power and may find themselves in a favourable negotiation position. The use of external debt to fund such a purchase will not be without issue, with the mainstream banks currently reassessing appetite, albeit the alternative and asset-based funding markets will provide some means to facilitate such a purchase.

Now could be a great time to consider this option and management teams and ultimate owners should seek the advice of their accountants and solicitors promptly and ahead of any negotiation.

At MHA Tait Walker we have advised on over 75 Buy Outs in the North East since January 2001, making us the most active advisor in the region.

For further advice, please email advice@taitwalker.co.uk.