Bimbos off the agenda?

No, sorry, this isn't one of those perennial debates on brains versus beauty, and, clearly, neither is it a blog entry you would expect from a certain Italian Prime Minister (though certainly the latter would make interesting reading!). Instead, with a hint of anti-climax, I am examining the current dynamics of the world of the management buy out (MBO).

Quite a few commentators are reckoning that the 'Buy Out is Back', and, having looked at recent deal patterns you would have to say that there is a reasonable amount of activity. What is less clear is whether these are distressed buy outs where the owners are looking to divest from underpeforming assets, or whether these are planned exit routes realising full value for the owners and, it is to be hoped, the management team that takes the business on. The deal patterns do not, however, seem to be showing a great number of external candidates buying in with the existing management (combine a Buy In with a Management Buy Out and you get a BIMBO).

Perhaps this isn't all that surprising - there seem to be two groups of Buy In candidates - the high net worths who very often will already have grown and exited a business; and the first timers whose role is to brings skills, experience, contacts that complement the existing buy out team. Many in the former group may still view making investments as too risky, though others may focus on the returns available from making risky investments. The latter group though are reliant on someone else's (i.e. the bank's) take on the risk of investing and with bank finance still very tough to come by, and very expensive where it is available, deals simply cannot be done at the right price.

The external finance problem will also be faced by management, so if a business owner has identified a MBO as their preferred exit strategy, what can be done?

In some cases the answer may be found in yet another contrived acronym - a VIMBO. This is a Vendor Inititated (also seen inspired - take your pick) Management Buy Out. Here, our hero (the Vendor) plays the role of either the bank/VC/private equity firm/combination of these, by effectively deferring the main part of the sale price.

Using the classic MBO model, where a new company (NewCo) is established to acquire the shares in OldCo from the vendor, we might see a situation where the vendor takes his consideration as some combination of:

• Equity in NewCo - generally not a controlling stake but enough to make it worthwhile for the vendor to participate in a secondary sale should the MBO team take the business on;
• Loan Notes in NewCo - these are simply loans, they may be secured, and they may be interest bearing. The vendor will probably expect them to be repaid within a 3 to 5 year timeframe;
• Cash - in most cases, it will be possible for the MBO team to use their own assets and perhaps some of those in OldCo as leverage so that the vendor gets a decent chunk of the sale value as cash.

The benefit of the VIMBO is that the vendor effectively fixes a price (provided it is a reasonable one), and the process can be far better managed - due diligence tends to be less intensive and unwieldy for instance.

Possible downsides of a VIMBO? Well, obviously you have to have the right management team there. If they're not capable of maintaining and then growing the business then the vendor's value represented in their NewCo equity stake and loan notes will be eroded. On the other side of the coin, in order to get that management team motivated the vendor will have to be prepared to take his hands off and sit very much in the background.

If you are interested in discussing MBOs, MBIs, VIMBOs or BIMBOs (of whatever type ;-)), or succession planning in general, or any other aspect of your business, do drop me a line at jprice@wkhca.co.uk

Cheers for now!