Making a Grand Exit

Many business owners who put their exit on hold because of the economic downturn are only now re-establishing a good trading record. To achieve the optimum exit strategy, planning should begin as early as possible.

Sunday Business Post 26 June 2017

“Smart owners seeking to exit their business used the last number of years to restructure and position their business in order to maximise their sale potential and valuation on exit, “ said Ann Marie Reddy, Director at Blackthorn Capital. “A key area of focus is on internal review of their structure and legal set up, directing key management and mentoring them for their eventual exit and making strategic decisions so that the financial resources are there to enable a deal to be efficiently structured. The detail is in the planning and it should start as early as possible.” She observed that regardless of the wider economic uncertainties, business owners and financiers are proceeding with deals, which shows a confidence in the businesses in question, and the market in Ireland.

As conditions for exit improved, there has been a commensurate rise in MBO activity. Reddy said, “Funding an MBO has always been a critical part in the process. The availability of funding has been challenging over the last number of years, but this is changing. There are new entrants into the market post Brexit which is a welcome development. We also see that existing providers are now more receptive to funding these deals. “Any provider of funds, whether private equity or debt will need to be convinced of two main things, namely, that the underlying business is strong, with realistic growth potential based on track record and sound assumptions going forward. Secondly, that a strong capable management team with drive, determination and back-up in the interim from outgoing business owners is in place.”

To effect a successful sale of a business owners need to take a number steps. “Planning is key, we have clients that have come to us looking to exit, but the timing may not be right for a number of reasons. The corporate structure may be wrong if there is a mix of investments and trade in the one company, which may require a reorganisation prior to any sale or exit. This can be commonplace. There may be opportunities to maximise tax efficient ways to exit and extract funds from the company, but the funds need to be there. There is often a pre-sale planning review undertaken to ensure that these measures are put in place.

The owner needs to have faith in their team. Has the management team the overall skills and drive and determination to carry on the business successfully? In most cases, there will be deferred consideration, whether defined or not, so there is a risk on the business owner should the business fail. Confidence in their ability to drive the business is a huge factor.” Some MBO’s fall through because the owner has unrealistic expectations when it comes to the value of the business and the timings. According to Reddy a smooth transition between existing shareholders and the management team is also crucial.  “You can have extremes where the outgoing owner finds it hard to ‘let go’ therefore frustrating the MBO team – or the opposite, where the exiting owner thinks they can fully exit on sale. A happy medium is a short to medium term transition, where each party, the clients and suppliers can all get used to the new structure. Shareholders are focused on maximising the underlying value achievable on exit. Management teams generally have more limited access to funds, which can affect the valuation and the timing of the payment of consideration.”

MBO v’s a trade sale

“The most obvious advantage of an MBO over a trade deal is a willing and incumbent management team,” said Reddy.  “Some trade sales can fail on the basis that the management team and the third-party buyer don’t have the right fit or if the buyer feels that there is a resistance from key management. From the management team’s perspective, there is no uncertainty that new ownership would bring. There is the new opportunity to benefit directly from future success than they would do as employees only. The management team would also be familiar with the company’s customers and suppliers and trading history.” She added, “The due diligence exercise is often a limited one bringing the costs of a transaction down, as the management team are privy to more information and data than a third-party buyer. Also because of the familiarity of the MBO team, the warranties and indemnities the vendor has to provide may be more limited than in the case of a trade sale.

From the vendor’s perspective, a trade sale brings with it many ‘tyre kickers’ looking to perhaps gain information on the business which would otherwise be confidential. This can cause time delays trying to seek the right buyer to engage with at the outset. Negotiations on valuation and structure can be less formal than would be the case in a trade sale with all parties usually able to agree major terms between themselves without the need for a protracted process.” Blackthorn Capital has advised on a number of high profile MBO’s, including John Paul Construction and Jones Group PLC and more recently PaperlinX (renamed GPMI), MBO of Irish Unit subsequently supported by Dermot Smurfit to carry out further acquisitions which we also advised on.”

MBO outlook

With MBO activity already up this year, Reddy predicts that the availability of funding from both existing and new providers will add competition to funding options which will drive further deals. “Also, business owner’s awareness that these deals can be completed is higher than ever. Incentives which are mainly tax driven initially to divest of shares is also increasing awareness and the advisor’s role is to ensure their client is aware of the opportunities out there and to get their client in the best possible shape to take advantage.“2017 has already seen a steady flow of MBO transactions in the SME sector and this is set to continue. Blackthorn Capital has a number of MBO’s in play at present with the activity looking positive not just for the remainder of 2017, but also into 2018.”