Management Buy-Outs

Introduction

• Where did buyouts originate? Historical overview
• Understand the difference between venture capital and private equity
• Key features of a buyout target
• Ups and downs for PE since 2020
• Pressing issues facing the industry

What do we mean by Management Buyouts?

• PE funds, their growth and their objectives
• Buyout financing – is it just an M&A deal with more participants?
• Breaking a typical deal structure down
• Assessing the feasibility of a buyout – key considerations
• Kick-off meeting: how to start putting a deal together
• What does a PE deal really need?

The Parties Involved in a Buyout: Respective Roles and Interests

• Management teams
• Seller(s)
• Private equity houses
• Banks and other debt providers
• Potential areas where interests may conflict – and how to manage these

Practicalities

• Ten key questions to ask
• What really matters?
• Legal documents – the requirement over and above that for a basic M&A deal

Buyout Economics: What Makes a Buyout Work Well

• Three key drivers of value and success
• The course presents a simple management buyout model you can take and adapt
• Flexed inputs to demonstrate the sensitivity of the key measures of return
• Understand the significance of cash generation
• Private equity buyout and the long term: Exit planning/ exit review
• Current challenges around exits
• How many buyouts fail?

PE – Industry overview

• How do we differentiate between equity houses?
• By sector
• By size
• By strategy
• How does PE make its money? The answer may surprise you
• Current controversies dogging the industry worldwide

The Position of Management: the most important people

• Their economic position in the deal
• Incentive forms: sweet equity and ratchets
• MBO training covers their rights during the buyout
• Relationship with the PE house: Governance and shareholder agreement overview
• Secondary management buyouts with management rollover

Why and How Debt Matters

• The principle of using other people’s money
• How leverage exaggerates equity returns
• Sensitising the use of debt; interaction with how much a PE house can pay
• Capital structure: the cost of capital concept, as applied to buyouts
• Interest deductibility and tax shelter
• The limitations to leverage: company debt capacity, debt market limitations, and tax deductibility
• The value of having competing debt providers
• Refinancing a deal mid-buyout: what this achieves (and for who)

The importance of Growth

• The single most important underpin of successful buyouts
• Sensitising the impact of growth above/ below plan
• Timing – why where you are in the business/ financing cycle matters

What if Things Go Wrong?

• Living with PE is great until …
• Development of economic interests – the model revisited
• Typical intervention rights for each party
• How – exactly – things can get messy …
• … and what outcomes may ensue

Management Buyout Case Study

• Review the business buyout plan
• Dealing with PE houses – key selling messages
• Choosing between three alternative bids for the same company
• The resulting deal structure
• Comparing economic outcomes if the business plan is achieved
• What has happened since?

Financial Sensitivity

• Using a workbook (provided) to help appreciate the impact of variation from plan (upside and downside)
• Cash generation, growth, the use of debt

Course Conclusion & Overview

MBO courses at Redcliffe Training are delivered by an expert who has worked on corporate finance and capital markets transactions for over thirty years, holding client-side positions and leading advisory teams.

At the Department of Energy, he was a civil servant involved in the privatisation of British Gas, a global IPO involving a large advisory team. He also spent two years (1990-92) in the Hungarian Government privatisation agency, working with many advisory firms, as the changing political environment triggered massive ownership change. He has worked in major investment banks (Swiss Bank Corporation International – now UBS - and Lazard) and also co-founded a successful M&A advisory boutique firm. In 2021, our MBO training specialist retired from KPMG, having spent 13 years in the firm’s global M&A business, based in Scotland.

His experience combines a broad range of M&A and equity transactions in North and Central America, Asia Pacific, major European countries, and, most recently, Africa. His MBO courses draw deeply on case studies from transactions he has run, bringing practical examples to set alongside the theory.

• MBO training gives an introduction to the concept of buyout transactions
• What drives buyout economics – understand the sources of funds (debt & private equity) and the key value drivers
• Explore the motives and objectives of private equity investors and their typical target returns
• Debt matters: demonstrate how debt enhances returns - appreciate the fundamental role of bank debt and the potential of other forms of buyout debt
• Why management buyouts are more complicated: Overview of the extra layers involved (relative to a trade sale) in putting buyouts together
• A crowded house: understand the roles of the various parties, and how to deal with each – focus on potential conflicts of interest
• Management’s role: understand the specific issues relating to the management team and what advice the managers will need
• Partnering: choosing the right equity house(s) to approach
• This MBO course covers the worst-case scenario: how MBOs may go wrong and what may ensue

 This course is aimed at anyone who may wish to have a better understanding of what an MBO involves.

 It is a ‘must know’ for anyone involved in, or expecting to be involved in, the buyout of a business, including:

• Business owners considering a sale, especially where a transaction involving the management team is under consideration
• to managers, who may wish to have a better understanding of what a sale involves – and the specific complexities of an MBO
• Business managers considering an MBO of the business in which they work
• Family business advisers
• M&A professionals in investment banks, boutique advisory businesses, and the corporate finance arms of accountancy firms
• Corporate business development teams, for example, in large, diverse PLCs where disposals of parts of the business may be on the agenda and an MBO may be an option
• Private equity professionals, particularly those new to the industry, who have previously trained as accountants, consultants or lawyers

 And a ‘nice to know’ for:

• Legal and other advisers involved in the M&A process, seeking a better understanding of the specific intricacies of a buy/ sell by way of an MBO.

The course is particularly helpful to those with some basic exposure to the concepts of management buyouts and private equity, and wishing to accelerate their understanding of what underpins successful deals.

Buyouts are such an important part of the M&A landscape. So important that in recent years they have made up to 50% of all transactions.

MBO training begins by helping you understand why buyouts have become popular, with a focus on the main industry participants driving activity – the private equity houses. Whilst these may appear to have much in common with each other, we take time to understand how to differentiate between houses and choose the ‘right’ buyout partner.

We then walk through what makes a buyout successful in economic terms, taking time to understand the importance of growth, debt and timing. Going beyond economics, the course explores the relationship between management teams and equity houses, the key to success, but also a relationship which can become tough when deals falter.

MBO courses include clear case studies and financial explanations, plus a look at the type of financial modelling on which buyout participants base their investment decisions. Participants receive a full and valuable overview of how to start on the journey to a management buy-out and plan a successful transaction.