The truth behind a management buy out

For many company directors, a management buy out (MBO) is an ambitious dream as it allows them to buy the company that they have spent many years building up.  Typically it allows them to invest their own money along with that of other funders, using the future profits of the business to pay back those funders, and then continuing to grow with the aim of repaying investors when they finally sell the business.

In recent years there have been fewer MBOs occurring amongst small and medium sized businesses in the North as there are less funds available for this particular type of transaction.  In the first [9] years of Tait Walker Corporate Finance we advised on [58] MBOs. In the last [6] years, since the onset of the credit crunch, we have advised on only [10].

Perhaps the true meaning of those three letters is getting lost and is poorly understood amongst the current crop of company directors.

It was with great delight that I was able to advise Chris Hyde on his MBO of JDP Contracting Services Limited, which was completed in November 2014.  Three months post-completion, I caught up with Chris over lunch and agreed to write this blog to summarise the truth behind a management buy out from the managing director’s perspective.

Q: Why did you want to buy your business?

A: I joined JDP in 2013 with a view to growing it and I soon realised that it was a very well-run company with massive potential. JDP is the North East’s premier installer of rooflines; it employs 30 people and has an established customer base, spanning a number of local authorities, housing associations and contractors across the North East, Yorkshire and the Midlands.  I wanted to do the MBO early so that I could benefit from delivering growth rather than seek to buy the company after I had increased its value to the vendors.

Q: How were you able to borrow the money to buy it?

A: The funding came from a number of sources; UK Steel provided the largest amount, HSBC provided the bank overdraft and myself and a colleague put money in ourselves.

Q: How much money did you put in personally?

A: A substantial amount!  I also had to provide personal guarantees for the bank funding so if I were to recommend an amount for others in my position, I would say be prepared for a contribution equating to approximately two to three year’s salary.

Q: How did you find the fundraising process?

A: It started very well – the business plan and forecasting process were very useful and it helped to see the whole strategy in a document and to see it being challenged by advisers and investors.  Getting the money from the equity investors was easier than I expected; UK Steel were very keen from the start and were able to make an offer which soon got put in to heads of terms.  Finding bank funding proved harder – our business has lots of contracts which made it hard for bankers to value the trade debtors and so their preferred choice of invoice finance didn’t work.  It was a complicated deal too which didn’t help and fortunately Alison Routledge at HSBC was able to see the potential of what we were planning and eventually we were able to get the right level of bank funding.

Q: What made the deal complicated?

A: Two reasons spring to mind.  Firstly, we weren’t just buying one company we were actually buying two, as JDP had been part of a private equity deal eight years ago. That created a lot more paperwork.  Secondly, we had to take our time at the start to make sure that we had the correct shareholder structure for investors, vendors and funders and that took a lot of time for all advisers to feel comfortable.  In the end we had three sets of lawyers who knew the deal inside out, as well as Tait Walker’s taxation team (led by Adrienne Paterson who was very helpful).

Q: How long did the whole process take?

A: About nine months from start to finish.

Q: What was the whole process like?

A: Exhausting but exhilarating!

Q: Knowing what you now know, what would you recommend to others?

A: I would say, ‘Go for it!’ The MBO process did take longer than I had realised, especially the legals at the end, and it wasn’t without its issues and sleepless nights.  But now I am an owner I can see that all of that time and planning has been properly invested and has been worth it. I have now a great incentive to grow the business and I intend to do just that.

Written by Steve Plaskitt. Steve is a Partner at Tait Walker Corporate Finance, who are celebrating their 15th year in 2015.

If you require any assistance in regards to management buy outs, please call 0191 285 0321 or email

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