A return of Management Buy Outs (MBOs)?
One of the many victims of the credit crunch and the resultant trading recession were the frequent Management Buy Outs (MBOs) that we had seen in the preceding years.
In theory MBOs are a ‘safe bet’ – management know the business well and should up their game with the added incentive of equity.
One of the features of MBOs before the credit crunch of 2008 was the increasing debt levels – particularly seen in the upper end of the sector. This meant that small reductions in profit and cash-flow, created substantial problems. In the last couple of years there have been some notable MBO collapses – including the high street store Zavvi.
MBOs in the current climate, generally involve reduced multiples and a larger ongoing financial involvement for the original owner of the business. This involvement can be an ongoing debt from the owner (usually known as vendor loan note which ranks behind other debt) or through the retention of an equity stake. During 2009, venture capital and private equity funds also funded some transactions which would historically have been backed by a bank.
Mercer & Hole have seen a couple of MBOs complete in recent months. Various banks are also making noises that they intend to focus on this area in 2010 – a position encouraged by government lending targets. For MBOs at the smaller end, the EFG scheme is available where raising finance becomes difficult.
Loans for management buy outs are available, and speaking to the right person at the right bank is fundamental to ensuring the credit application process is successful. As always, please do call or email me if you would like a steer on the right bank (or equity fund) to talk to you for your funding requirements.
Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.
