Top 10 tips for MBOs

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Richard Feltham, head of corporate finance at Garbutt & Elliott, gives his tips on successful management buyouts (MBOs)

1. Carefully assess your management team. One constant and unchanged fundamental is the importance of quality management and an appropriate and balanced team. Management is, and always has been, the cornerstone of a good business and can make or break the success of an MBO in the eyes of backers.

2. Lock in your team. Having assembled the right team make sure they hang around and are incentivised. Earlier options or bonus mechanisms can ensure you don’t lose a team member just before the transaction.

3. Be sensible about price. Appetite for MBOs and transactions generally are improving but negotiation is still key and buyers and sellers see things differently.

4. Get tax advice early. Entrepreneurs’ tax relief continues to be massively beneficial to sellers, and for example, excess cash can be extracted at 10 per cent tax rather than higher levels associated with dividends and remuneration.

5. Have a well-defined growth plan. Growth potential has always been crucial, but investors are now doing more homework on commercial aspects.

6. Understand the risks and upsides in the business. Demonstrable knowledge of market dynamics and growth potential, as well as barriers to entry and product/competitor positions, are of increased importance as investors and lenders take a more cautious approach, focusing more on detailed commercial due diligence.

7. Show your passion. Investors and lenders need to be enthused about the opportunity.

8. Don’t rule out different structures. It is often better to get a deal away in a slightly different format than it falling over altogether.

9. Act calmly and present information clearly and succinctly. This not only assists the process but also sends subliminal messages to funders about management quality.

10. Appoint quality advisers.