Management Buy-In: a practical approach

Posted on 27/11/2018

Events

If you are looking for one of the most efficient ways to take over a company or to boost your own company, with limited resources, a management buy-in could be the best option. This new business trend will be explained in this article thanks to three experts, who were invited by 3W. Boudewijn Dupont, Managing Director at 3W, is our first speaker on the 25th of October. Before introducing his stage partners, he is elaborating on the advantages of a Management Buy-in (MBI).

Management buy-in and company acquisition

A management buy-in happens when an external entrepreneur or interim manager – the buy-in manager (BIM) – is taking over a company (the target), which entails the appointment of a new management team to run the company. ‘This is the most ideal way to transfer a company. Today, the demand is surpassing the supply which means that fierce competition is not unimaginable. ‘explains Peter Decoster, growth and transfer coaching expert. Each case is different and depends on several factors, both on the target company’s and the buyer’s side. Numerous factors can be: the industry, family relationships within the company, the company culture… ‘An MBI usually takes around one year and a half. You can consider this position as a full-time job that offers more than people often presume.’ confirms Lars Raedschelders, lawyer and partner at Sherpa Law.

Nothing but advantages for SMEs

‘The owner of a SME who is considering leaving the company, but who is not willing to back out completely (yet), can perfectly resort to an MBI in order to initiate the first steps of a so-called ‘soft-landing scenario,’ Peter Decostere tells us. He elaborates on the most impressive advantages: ‘A BIM is showing full engagement by contributing financially, either through own resources or a capital injection. The BIM is an asset to the company because of his experienced profile and yet, his pay check is reasonable, in comparison with more standard remunerations for similar functions. Additionally, both parties tend to build a strong understanding and relationship, which may contribute to – or even guarantee – the continuity in the company. An MBI is most certain to introduce fresh ideas into your business.’

Six advantages presented to the buy-in manager or the potential acquirer

  • Being a majority shareholder is much more interesting fiscally than heavily taxed pay checks or invoices.
  • A co-management position feels very different and ensures more autonomy.
  • A SME is dealing with less ‘political influence’.
  • A BIM is taking over a company that is currently operating. He or she does not have to build up something from zero and is immediately sure of a regular income.
  • The BIM is using his expertise to stimulate the company and is working closely with the co-owner.
  • An MBI reduces the risks, compared to a complete acquisition and the BIM may benefit from the large timeframe to really get to know the company.

Money is not the only driving force

Experts are in unison: the success of an MBI depends entirely on the agreements made and the transparency established – whether it be operational, legal or financial understandings – between both parties at the start of the process. ‘Exit scenarios, share values, company culture, (unobtainable) expectations… Numerous factors are to be considered when a company is being acquired. The only way to ensure a smooth transition, is to align all those elements. Meeting halfway can do wonders for an operation like this.’ Peter Decostere explains.

Lars Raedschelders adds on to that and tells us that no MBI will ever be the same. He also explains that the value of the company is not always the toughest issue to settle. ‘Many SME owners are focussing on keeping the continuity in their company rather than adding value. The ultimate purpose is to find a buyer who will be able to run and develop the company. It is essential to build a relationship of trust.’ Legally, the focal point is the letter of intent (LOI). This document contains the written exclusivity and non-disclosure of both parties and outlines a successful acquisition for the buyer. ‘No less than 77% of Belgian merger & acquisition propositions contain an LOI clause. If this document is badly drafted, both parties are at a much higher risk regarding the conditions of the transfer.’

Putting a number on the value of an MBI: no exact science

Traditional value assessing methods include ‘shared value’ and ‘DCF’ (discounted cash flow), but another way to determine the value of a company is the ‘enterprise value’ method. The EBITDA is calculated and a ‘multiple’ is used as a corrective tool. The calculations are based on earnings before interest and taxes and a subtraction of the net debt, while simultaneously taking into account the current market value. ‘When we look at an MBI from a legal or financial point of view, we can consider it to be an LBI (leverage buy-in). The acquirer is buying a company with a potential leverage effect and limited private equity to invest. A holding is set up in order to carry out the acquisition, and it is in fact this entity that is taking out a loan to finance the transfer,’ explains Jill Hoornaert, Partner Debt & Equity Funding at Moore Stephens. ‘Valuations are rising, mainly caused by the real estate and pharmaceutical industries. Two domains where multiples are rocketing to 9 and higher,’ Peter Decoster swiftly adds.

Even though it may seem like a ‘must’ to set up a holding in order to finance an acquisition, Lars Raedschelders is pointing out the advantages of combining this with the ‘debt push down’ method. ‘The debt caused by the acquisition is passed on to a business partnership. Make sure you are aware of all legal limitations, such as financial support. The ban on this type of partnerships has been lifted, however, there are still some criteria to consider.’

Do focus on the framework

If you only want to take away one piece of advice from experts, then you should read this: plenty of meetings and pre-determined agreements are essential. ‘Think about all the imaginable scenarios, take a close look at the family members involved in the organisation and do avoid a 50/50-division, because this could lead to endless discussions when issues have to be solved. Consider an observation period of three months’ time, because the only way to find out if the right decision has been made, is to work together and get to know all parties. Do not give up, even if the negotiations are not going as planned. Count on legal and financial advisors and strive for the most balanced situation possible.’ Peter Decostere cautions. ‘Our financial advice always includes an examination of the attainability of the MBI. We are investigating the SME and drafting a precise, but realistic business plan.’ explains Jill Hoornaert.

Where to find SMEs that are looking for an acquirer?

As an interim manager, you are given the ideal position to enquire with the company you are assisting, or you can consider an OBO (Owner Buy Out). Several platforms can assist you with reaching out to the right people: buyinmanager.be, 3W.be, ING Mergers & Acquisitions, overnamemarkt.be,…

Interested to find out more about Management Buy-In? Don’t hesitate to contact us!