Business Finance: David Scrivener on why MBO activity is increasing

David Scrivener, Ensors

David Scrivener, Ensors - Credit: Archant

AGAINST the back drop of the longest recessionary period this country has ever witnessed, it is perhaps curious to be writing about an increase in the number of management buy-outs (MBOs) in the region.

After all, individuals, businesses and banks are sitting on their hands (and their money), right? Well, not so in our experience. We have seen a marked increase in the number of clients approaching us looking for ways to structure an MBO. Why is this happening? Well, we have to think of the position firstly from the vendor’s point of view.

: : A tough market for trade sales: Currently it is not an easy market in which to sell a business. Find the right buyer (as we do!) and it is achievable but they are scarce and inevitably there will be a “fight” to get the right price.

: : A tax rate of only 10%: We can structure MBOs to ensure that vendors get locked up cash and the enterprise value of their business out at an effective 10% rate of tax. When compared to potential income tax rates exceeding 40% this is clearly very appealing.

: : A sale has been put off for long enough: A number of business people have put off selling their business over the last five years hoping things would get better. It has got a little better and if you were aged 65 then, selling at 70 now might be even more of a priority.

: : A desire to stay in control: It is possible for vendors to control the MBO process and initiate key events such as the structure of the deal and the way that it is funded. An MBO carried out in this way enables vendors to test the viability of a deal before management even have to be involved.

But how do we fund it? Management don’t have enough money…

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We are gradually seeing an increase in appetite from lenders to fund MBO transactions. It is nothing like the heady days of the highly-leveraged transactions that we saw in the early-mid 2000s. However, if you have the right mix of assets to secure against and a vendor prepared to stay involved then structuring a deal becomes eminently possible.

Vendors are key to MBOs working in the current climate as any balance of funds that cannot be raised externally will effectively be funded by the vendors. It is common to retain equity and also receive loan notes or deferred consideration to achieve this.

So is it right for you? Whether you are a manager thinking this would be a great opportunity to own the company you work in or if you are a vendor struggling to unlock the value of your company then an MBO could be the answer – even during a recession.

: : David Scrivener is corporate finance partner at Ensors Chartered Accountants.

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