This is an extract from a Catalyst White Paper which you can download in our Resources section

Three factors are essential if a management buy-out is to be achieved: an effective management team (explored in part 1), a strong business and a suitable exit opportunity.

A Strong Business

Most management buy-outs involve high levels of debt, especially during the early years.  Accordingly, a positive cash flow is required.  A business will be less attractive to financial backers if the cash generated is absorbed by additional working capital, uncontrolled growth or a high level of capital expenditure.

As a general rule, the following characteristics help a buy-out;

a consistent track record of turnover and profit growth or demonstrable scope for improvement;

a strong competitive position within a growing, stable industry;

a spread of products and services;

strong asset backing or demonstrable cash generation.

As a result, most businesses lend themselves to a buy-out if they possess the above features.  There is a common misconception that ‘people’ or ‘creative’ businesses are more difficult to buy out.  This is not true provided that the business shares most of these features.

Suitable Exit Opportunity

As most buy-outs depend upon both equity and debt finance, the repayment of both needs to be considered at the outset. The leading debt provider will usually expect both interest and capital to be paid back out of cash flow over a specified period, often 5-7 years.  Debt providers will not want to rely on an exit for the repayment of the loan.
Providers of equity capital, however, will require an exit for the bulk of the profit they expect to make from backing the transaction.  In most cases, they want to realise their investment within 3-5 years of the buy-out.
Investors tend to maximise the annual compound rate of return by an early exit.

The probable exit opportunities are:

a sale of the company to a trade buyer;

a flotation of the business on the London Stock Market, the Alternative Investment Market (AIM) or Easdaq;

and  the management team may buy out the shareholding of the institutional investor, or even a manager wishing to leave or retire, if the business has generated sufficient profit and has adequate cash or borrowing resources.

In a substantial majority of cases, however, the most likely exit will be a sale to a trade buyer.

For an attractive exit, it is important that the business:

has achieved satisfactory sales and profit performance for the preceding 2 or 3 years, compared with other companies in the market sector;

is capable of sales and profit growth during the medium term;

is not unduly dependent upon either one or a few customers;

and has a management team committed to the development of the business.

Consequently, a management team will have to demonstrate how they will achieve continued sales and profit growth throughout the foreseeable future in order to get financial backing.  Attempts by a management team to mount a management buy-out simply to retain their jobs would not receive backing unless the prospects for a successful exit are demonstrated. As a potential purchaser will generally require the management to continue after the acquisition, the management team should not assume that they will exit at the same time as the institutions.

The casting vote regarding exit is a matter for negotiation. There are likely to be detailed discussions as to the circumstances in which either management team or investors can sell their shares and the rights and obligations of other shareholders in such circumstances.  Investors will not want to coerce a successful management team into an exit.

It is quite common for a participating or accelerating dividend to come into operation after, say, 2 or 3 years, giving the equity investors a right to a proportion of profits.  This form of finance is expensive and is intended to focus the management team on the advantages of an exit. In addition, a majority of the equity investors’ investment may be in the form of loan notes or preference shares repayable or redeemable to a fixed timetable, sometimes at a premium.

See Part 3 next week for an overview of the stages of the buyout process. Or you can download the white paper from our resources section.


This is an extract from a Catalyst White Paper which you can download in our Resources section

PART ONE: What is a Management Buyout?

A management buy-out is the purchase of a business by its existing management, usually with the help of financial backers. Over recent years, several hundred buy-outs have been completed annually. The bulk of the funding will come from financial institutions in the form of equity and debt.

Different types of financial instruments have tended to obscure the difference between the two. Debt is usually provided by specialised acquisition finance units of UK clearing banks or investment banks, while equity is provided by venture capital or private equity houses. The opportunity for a management buy-out may arise in a number of ways:�

a group may decide to sell a business because it has become non-core;

a company may find itself in difficulties and need to sell all or part ofthe business;

the owner of a private company may wish to retire; and

a receiver or administrator may sell a business as a going concern.

Three factors are essential if a management buy-out is to be achieved: an effective management team, a strong business and a suitable exit opportunity.

Each is examined in detail:

The quality of the management team is the most important element of asuccessful buy-out. Financial institutions need to be convinced that themanagement team has all-round strength and can manage the business independently. Tax, treasury and research and development may have been handled at group level and the management team may need strengthening in these or other respects.

The management team will need to demonstrate a high level of commitment to the buy-out and to the subsequent successful growth of the business.The equity investors will expect each member of the management team to invest personally. The amounts involved are intended to be significant commitments by the individuals concerned and will vary according to the circumstances but are likely to be the equivalent of at least six months’ gross salary.

Provided the personal risk is acceptable, the equity investor will welcome a larger investment by the management team. Opportunities for other managers and staff to invest smaller sums can be provided. It is quite commonplace for the leader of the management team to have the opportunity to invest more than other key team members.In most cases, the leader of the buy-out team will be the present chief executive. It will be his or her job to ensure that the management team is not overly distracted during the buy-out. It is often appropriate to delegate the day-to-day involvement in the transaction to one or two individuals, and for them to provide regular updates for the team.

See Part 2 next week for examination of a strong business and a suitable exit opportunity. Or you can download the white paper from our resources section.


Richard TurnerWe have done over 50 deals of varying sizes. The key is to remember that you are selling a product (your company) the VC is selling money. They work hard to find good deals you are working hard to find the money. Both want to do deals. So some advice:

1. Fund raising is a strategic not tactical decision like all strategies it needs to planned and enough time allocated. We believe that it takes about a year from start to finish.

2. Take advice – its a minefield and you need all the help you can get. It also says that you are serious about doing a deal. VC’s also recognise that if they behave less than transparently word will get about what is a very small community.

3. Research your target market. Look at deals done not what they say. Make sure they have money to invest at the right deal size.

4. Create a competitive market always have at least three live options on the go at once. Never assume anything will actually happen.

5. Create an atmosphere of trust. If trust is not reciprocated then walk away. This is a marriage with little chance of a divorce

6. Listen to your advisers on deal terms. They should have done all the research on comparables etc.

These are my top tips – I’d be interested to hear yours, either from an investors’ point of view or from the other side of the table.


The argument for telemedicine is very compelling, particularly in the arena of geriatric medicine and post operative care. Most people are they grow older would like to be in their own home and evidence suggests that patience recover more quickly at home after an operation.

The technologies to allow this to happen are growing rapidly but how do you make money? Selling technology to the NHS is a very long haul. There are pressures in the NHS to increase efficiency and reduce costs which should create compelling pressures however we suspect only short term benefits are likely to be recognised. Long term gains will require substantial investment. Investment that is unlikely to be forthcoming. Our in-house analysis shows that it is likely to be the service providers.

These are companies that offer services to care homes, retirement villages, and individuals on a private basis and can pick and choose their technologies and offerings. These companies benefit from long term service contracts and a captive market. A stunning example is Cirrus Ltd. These are telecoms and systems integrators that have moved to become service providers and are taking advantage of this growing market. We expect to see this sector become a rapidly growing market.


Richard TurnerI was a “Elevator pitch” judge at the Said Business School Financing for Growth workshop yesterday. In all I was pitched at by 12 companies. I set out below the criteria we marked the companies by:

1. Was the target market clear?

2. Was the value proposition explained?

3. Was the target market quantified?

4. Did they explain the companies competitive advantage?

5. Did you believe they could execute?

6. Did the management team come over well?

7. Was the use of the funds and the milestones made clear?

8. Did they explain the exit strategy?

9. Were returns to investors explained?

10. Would you be willing to meet this person again?

A tall order to get all 10 points into a 2 minute pitch. My own list is a little shorter:

1. What we do/problem we are solving

2. Size of the market

3. Key strategic asset/competitive adavantage

4. How much money

5. Expected returns

That should be enough to get the next meeting which after all is what an elevator pitch is all about.


Richard TurnerWhat am I worth? Valuing early stage technology companies is an art not a science and depends on the purpose of the valuation. The bigger you are the easier it is and any decent accountant can come up with a plausible range.  When you are small different rules apply. I once sold a software company in the US with a $1m turnover for $49 million – how did that happen? Well the purchaser thought it could plug the product into its range and generate an extra $250m revenues a year. It estimated that it would take two years to develop a  competitive product so total  foregone  revenues would be circa $500m. It paid 10% of that and got a bargain.    So what’s the answer? Well it all depends.  As I write this I realise that this is really far too complicated for a blog so I think a white paper is required. Watch this space.


Richard TurnerI have Just came back from a two day biotech conference. I go to conferences to meet people, find opportunities, and keep up to date with the sector – probably in the that order. Inevitably I get my fair share of impromptu pitches and I am always amazed at the gap between the expectations of entrepreneurs and investors. Entrepreneurs typically play down risk, over value propositions, and under estimate the time it takes to do anything. Excessive bullishness does not instil confidence it breeds suspicion and a lack of credibility. Investors want to see realistic targets. I would much rather have the view that the entrepreneur was being excessively cautious rather than over optimistic. The mantra should be “under promise over deliver”.


What do clients want?

Posted by RB   Categories: News,Richard Turner   530 Comments »

Richard TurnerI had a very interesting meeting today with our executive search company where we were discussing what do clients want? It seemed to boil down to three things: someone who understands their business; someone who can assess individuals so that they meet their needs; and someone who can provide people who meet the bill. In short it’s all about not wasting clients time. This leads me to the conclusion that specialisation is the key.