The first preparations for a MBI/MBO and M&A deal, if carried out carefully and thoroughly, can provide an ambitious team with a considerable advantage.  An option sometimes open to senior executives within organisations is to consider a life outside the large corporate sphere, perhaps even starting their own business or, using their experience and contacts, to buy a share in a business they may know or understand. Others working within a business may wish to buy a management position or assemble a new management team, and these notes are provided to assist in making early stage assessments of such opportunities.


MBI
A "MBI" or 'management buy in' is where a company is sold to a new management team who take a majority stake. Frequently it is used to ensure the continuance of family firms where there is no clear plan of succession. On occasions, a family member, or one of the previous owners, will retain a small stake. Funding for MBIs is often supported by venture capital firms and, as such, they will usually have one or more seats on the Board.

To drive a successful MBI deal it is essential that the prospective management team can demonstrate they know their target, its market and future prospects extremely well. In an ideal situation they will already be active in management in the target market and able to write a clear and concise business plan.

An alternative strategy to driving an all inclusive MBI deal is to agree with the owners to take a senior position along with a small equity stake, thus securing a Board seat, and to then progress towards an MBO. This then ensures the 'inside story' is known and understood prior to taking on and investing in the business.


MBO
An "MBO" or 'management buy out' is where a business is purchased by its management often with the support of external funders. From a funder's perspective, the funding risk is to a degree mitigated by the fact that the managers undertaking the MBO will know the business from the inside out, and will be pledging their own capital in support of their plan, as a team with a known history.

For managers, participating in a MBO is a good way to buy a useful stake in a known company for a modest investment, and as knowing their own business, their own investment risk is mitigated.

In an MBO the existing shareholders will, more often than not, sell their entire shareholdings to the management team and their backers, with the management team usually gaining control. If the funders take the controlling shareholding, it is more often referred to as an institutional buy out, or an IBO.

As with an MBI, funders are likely to include venture capital funds, banks, regional funds and, on occasions, a private equity investor, all investing alongside the management team.


M&A
M&A ostensibly stands for 'merger and acquisition'.  True mergers, that is the one for one swapping of shares between two companies, are not common.  More often than not one side is stronger than the other, so a majority of mergers can be said to be acquisitions.

Mergers and acquisitions often start out with great ideals; but statistics suggest that only a small number actually deliver the desired outcome.  If they are meticulously planned with realistic expectations, and led wisely and carefully, they can deliver considerable long term benefits for those involved.

Some major companies have honed their acquisition strategies to a fine art and are consistently successful in delivering above-average results. Others appear to struggle and seemingly fail to deliver the benefits that were apparently so important to the deal. One thing is clear, that M&A is not a panacea for failed management but, when driven astutely, can make substantial contributions to progressive corporate growth.

We have experience in the sector and welcome enquiries for funding your merger or acquisition strategy.


Searching for targets
NSConsulting will search for targets for you and either assist you in making your own approach or make an approach for you. Please ask us to quote you for this activity.  It is wise to recognise that it may take time to find a suitable target.  In addition, there is no guarantee that the selected target will respond as you wish, or in your chosen time frame.  Experience shows that it is advisable to allow up to at least a year to find a suitable target and prepare plans for funders.

What makes a good target?
A good target will be a commercially viable business with an excellent track record of achievement in its sector.

It will have an established market with a solid customer base; no more than 25% of its turnover with one customer and a defensible position within its industry sector.  It will be able to demonstrate good prospects for growth for at least five years hence.

The business will have likely developed a 'Blue Ocean Strategy'™ to position the company in an uncontested or little contested field of activity and perhaps made at least some of its former competitors potentially irrelevant; see... www.blueoceanstrategy.com

Key essentials are a clear strategy for growth delivering a stable cashflow delivering regular income with good profitability, underpinned by strong financial controls and robust systems, delivered by a willing workforce and supportive management.


Management teams
A strong management team is absolutely essential to any MBI/MBO or M&A activity.  So what is a 'strong management team'?

In our opinion it should at the very least include...

A chief executive with sector experience, good leadership and management skills, capable of, or used, to taking full P&L responsibility, and able to express a clear vision of the future while driving the business forward.

A finance director who knows and understands the business and the industry sector, who can install and maintain the required rigorous financial controls and essential reporting disciplines.

A sales director with a history of achieving growth who has extensive sector knowledge and experience; who knows the competition, can drive profitable sales, possessing an effective grasp of modern marketing and is a proven manager of sales teams.

An operations director who has a good knowledge of the technologies and processes involved and an accurate understanding of the cost base; used to upholding high standards of quality while seeking continually to improve methods and reduce costs.

A technologist expert in the technologies able to advise and, where required, participate or lead in new product development.


What's next?
We look at each case on its own merits, noting that this area of funding may, on occasions, involve elements of corporate recovery activity.

We will meet with you and your team and examine your proposals before offering you a formal 'Letter of Engagement'.  Please refer to our page on "5 steps for business Funding" for an example of our funding methodology; see... 
Funding Process - 5 Steps to Business Funding

If you are planning your first MBI/MBO or M&A activity with a view to forming a small plc, and perhaps looking towards an IPO, please inform us at an early stage so that we can advise you accordingly.