Catalyst Venture Partners

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.