Management Buyouts (“MBO’s”) – Valuing the Business
So you’ve now reached the serious negotiation stage with the owner, and need to agree the right price – and indeed structure – of the deal.
Having reached this stage almost certainly indicates that the owner would quite possibly prefer to sell to you the management, for all the reasons previously outlined in previous blogs. But you cannot take this for granted, the deal still has to be right for both sides.
• Having got this far you’ll have a good idea what the key issues are for the owner, and how you as the management team can address those.
• You’ll expect the owner to be talking to other parties, even if the preferred deal is with you as the management team.
• Ultimately however strong that desire may be, the owner must achieve a fair and reasonable price, and will only be able to discount that so far.
• In terms of value you may well be at a disadvantage to external trade buyers, where future synergy with their own operations confers additional merger value which can be reflected in a higher offer price.
• However, although as the MBO team you cannot match that merger value, through your better inside knowledge of the business you will know where potential savings can be made, you will understand and be able to discount possible future risks, and can identify further growth areas which you can factor into your price.
• All these aspects will assist you in competing with external offers, and your advantage will always be that as a known and trusted buyer, the owner will feel comfortable in agreeing more flexible terms and structure.
• However, ultimately you must not overpay, this will simply place you and the business at greater risk. In arriving at your offer price, you must clinically assess future risks as well as opportunities, and possible threats as well as strengths. Evaluate and incorporate the likely buffer you should have against future uncertainties and unforeseen circumstances.
• The owner will of course already know where possible future issues or problems may arise, so you should feel able to discuss these openly and firmly, in a way an external buyer will not be able to do.
• Ultimately, the devil will probably be in the detail of the offer, specifically the deal structure. You should be able to negotiate that only a reasonable amount of the price is paid on completion, with deferred consideration paid over a longer period, as the owner should feel more comfortable with you than with unknown external buyers.
• Finally, for you as all buyers, the value is not all just in the money, but also in other factors, and as the MBO team through your relationship with the owner, you will know what other factors are important to him, which you can incorporate into your offer to increase the attraction of selling to you.
The fact is that a business can be worth twice as much to one acquirer than to another, and neither will be right or wrong. Ultimately, the deal must be fair to and meet both sides’ objectives.
18 December 2018