Choosing the right exit route

Sep 06 issue

Every entrepreneur selling their business wants to obtain the best combination of price, form of consideration, deal structure and compatible purchaser within an agreed timescale. The type of exit chosen determines much of this and two popular methods of disposal are selling to another business or being bought out by your management team. In both cases, there are many players involved â“ the buyer, the seller, investors, professional advisers, management, employees and even family members. In addition, there’s an array of competing ideas of how the business should be run in the future, what its growth prospects are and, crucially, what it’s really worth. With all this complexity involved, it’s not surprising entrepreneurs find it difficult to choose an exit route.

The UK buyout market is particularly buoyant at the moment, according to statistics from the Centre of Management Buyout Research. A record number of exits (337) were completed in 2005 and their value rose to a new high of £21.7 billion by the year-end. The first quarter of 2006 has seen 29 trade sales and 161 buyouts, of which a staggering 106 have been MBOs.

So why are MBOs so popular? One obvious answer could be the emotional advantage they have over other exit routes, fulfilling an entrepreneur’s natural instinct to pass on the enterprise they’ve nurtured to worthy successors.
Mark Wignall of Matrix Equity Partners, an active backer of management buyouts, says, ‘It’s quite common for human sentiment to make an MBO a preferred route. The perception is that the current management team are uniquely placed to understand the business, and perhaps it’s also a case of "better the devil you know".
‘We recently backed a buyout of a company called Pasta King where the family owners had deliberately groomed their management team rather than considering selling to an outsider. There was a sense that “keeping it in the family” was preferable.’

Management matters
However, one of the downsides with MBOs is that it’s not always easy to nurture talent from within the business quickly enough to meet the exit plans of the owner, nor is it straightforward to find talent from outside to bring in as heirs to the business throne.
‘For an MBO to succeed, you’ll need to sell to an identikit management team, so start putting that together far in advance of when you’d like to exit,’ says Jeremy Furniss, partner at independent corporate finance house Livingstone Guarantee.
Ideally, this would include an obvious leader or CEO-elect and a strong finance brain. ‘Even for small transactions, financial backers of MBOs will want the reassurance that a finance director or similar exists as the principal contact for key financial information,’ he says.

Laying the groundwork
Few directors can afford to buy a business outright with their own cash, so the buyout team will need to convince finance providers they are competent to take over the reins in order to get backing. Typically, private equity providers will want to realise their investment by achieving an exit, generally within three to five years after backing an MBO. They usually desire a 30 per cent return on investment by
that time, so effectively will only back businesses that are likely to grow quickly in terms of profitability and turnover.
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Scoring big when selling up

Shrewsbury Town Football Club chairman Roland Wycherley has just been through what he calls the ‘emotional trauma’ of selling the business he’s built for 34 years. He founded The Midshires Group, based in Shrewsbury, in 1972 and it became one of the largest independently owned vending companies in the UK. It was sold for an undisclosed sum at the beginning of this year to Bunzl Plc, the international distribution and outsourcing group.

‘Every entrepreneur instinctively knows when the time is right to sell, but it’s still an emotional trauma even if you’re ready for it,’ says Wycherley.
He says his management team weren’t inclined to take on the financial burden of borrowing to buy the company, besides which, ‘two powerful players’ in the trade made offers to buy him out. ‘I chose to sell to Bunzl because I believed them to be an ethical operator that understood the business. Acquisitions are a sensible option in this industry, and organic growth is very difficult to achieve in present economic conditions. Times are tough, depsite what the Goverment says.’

He was determined to crystallise the value he’d built up in the business during three decades by securing a lump sum payment. ‘It was a cash sale done on the day â“ I didn’t want to take a stake in future earnings or shares and the like.
‘One of the best decisions I made was to get advice and expert help selling my business. I had a perceived value of its worth and I’m happy to say that Mackinnon Corporate Finance helped me receive 15 per cent more than that from the sale. It’s not always easy for business owners to trust advisers, but I’m glad I brought in expert help. I’m very pleased indeed with how it all turned out.’

And although he’s no longer running his own business, Wycherley is gainfully employed in the not exactly small project to build Shrewsbury Town’s new
£1.5 million stadium. ‘It’s keeping me busy,’ he confirms.

Additional advice

You can benefit from a wealth of free advice from entrepreneurs who’ve sold their firms, private equity providers and corporate finance experts by attending a series of free seminars at Arundel House in London.
‘Planning the Perfect Exit’ and ‘Completing the successful MBO’ are seminars organised for anyone considering how to sell their business or buy the one they manage. For more details and to register for these events, visit www.businessxl.co.uk/live