Michelle Rodger: Management buyout can be the big new idea for frustrated employees

Published on Saturday 6 February 2010 15:44

ONE of the biggest challenges facing wannabe entrepreneurs is coming up with the "Big New (Money-Making) Idea". But many potential entrepreneurs will be wannabes forever if they think their big idea has to be new.

If you love your job, work for a great business but feel frustrated with the boss's plans for the future, you might well consider a management buyout (MBO). With the recession just behind us, it could be the perfect time to consider buying out your employer.

The market – although not the desire – for MBOs shrank over the past year or so. Most businesses focused on survival rather than growth. The result was the volume of private equity-backed buyouts plummeted to its lowest level for a quarter of a century, while their value totalled a meagre 4.7 billion, the lowest since 1995, according to the Centre for Management Buyout Research.

But now experts are spotting signs of confidence in the buyout market – the last quarter of 2009 saw a 48 per cent increase in the value of buyouts and a rise in the number of 100 million-plus deals.

Cameron Blackie and his colleague Rory Ballantyne have just completed an MBO of the DTZ residential estate agency business in Scotland. First mooted 14 months ago, it took until October last year for the idea to take hold. Between October and January, Blackie and Ballantyne worked in their day jobs and masterminded their new venture in the evenings and at weekends, closing the deal just in time to meet their launch date.

Sleepless nights and fears that not all clients – or employees – would move with the new venture proved unfounded. Blackie and Ballantyne kept most of the staff, and all of their clients.

"We wanted to offer a broader service to DTZ clients, but with the same customer relationship focus," explains Blackie. "We saw the opportunity to do this at DTZ and decided we could do it ourselves."

A month in and business is good. Getting to grips with life as a small firm – without the large business central support functions such as HR, payroll and IT – is proving challenging but rewarding. And despite the property market being particularly damaged by the recession, Blackie and Ballantyne are predicting a positive year for the Scottish housing market and their fledgling business, with sales of more than 400 properties anticipated in their first 12 months.

Theirs is just one in an upturn in buyouts which suggests 2010 should see a boost in private equity activity. Good news for anyone pursuing an MBO.

According to Christiian Marriott, director at Barclays Private Equity, the average equity contribution rose, although by contrast the proportion of senior debt fell sharply, reflecting the tightening of bank debt during the year. But, suggests Marriott, there appears to be a "greater appetite" in the market.

So if, like Blackie and Ballantyne, you want to feed that appetite, what are the issues to consider? It appears people, and not necessarily the business itself, are the most fundamental factor.

From an investor's perspective, a strong management team in a weak business is a better bet than a weak management team in a strong business, and it's the quality of that team that is crucial when investors consider funding an MBO.

Peter Shakeshaft of Linc Scotland and Symphony Corporation, who has been involved in a number of MBOs, says many deals are prompted by frustration on the part of employees being unable to do the things they think would benefit the business. These ambitious and focused individuals can actually give a new lease of life to a tired company through an MBO.

Shakeshaft says one of the key elements is the management team, which must be good, strong, have confidence in the future of the business and be committed to the extent they are prepared to put their own money where their mouth is.

An MBO is often considered a better option for investors since the management team knows the company, its customers and market, as opposed to an MBI (management buy-in) where it's a new team with a limited understanding.

From a financier's perspective, credibility and hitting targets are crucial for an MBO to become successful. If you don't hit targets, the bank can lose confidence and that leads to a downward spiral, warns Stewart MacDonald, corporate finance partner at Scott-Moncrieff.

He also warns that the MBO team must engage with staff and clearly set out who is doing what to ensure key clients are kept on board. The focus should then be on running the business successfully, ensuring strategy, operational planning, delivery and performance management are all aligned. Put like that it sounds simple, but it's clearly not. However, the end usually justifies the means, and if you get to buy out and run your own successful business, it's bound to be worth it.