Buying Out Your Own Company is not just for Christmas

Over the last few weeks several thousands of dogs and cats will be sent to the RSPCA, given away or even put down or drowned because their owners didn't want the commitment from owning them. Buying out your own company, like getting a fluffy pet at Christmas, is not just for Christmas, it is for the long term.

Often, when a management team thinks about performing a management buy out, they get focused on the process and enticed by talk of their share of the pie sometime down the road.  Stories of £millions, the glamour of high powered advisors and the sweet talk of Private Equity investors flatter and fetter the management team. The cold light of post deal business as normal often comes as a shock.

The most critical time for a management buy out is just after the sale and the first year.   Once the excitement of the buyout has gone, the managers are left with their projections and investors with the promises they have been given (often enshrined in the agreement linked to painful warranties).

Many case studies reveal that, even though managers say they don't over egg the projections for their business, their subconscious works in mysterious ways with the promise of financial independence just a step away. When the suits disappear and it is business, not as normal, but on the steroids of the optimistic business plan, the reality seeps in.

The basic rule of buy outs is the 3x rule.  It takes three times as long to get funding, three times as much effort to reach business plan and you need three times the staying power to reach the goal of the windfall at the end.....which will be three times further away than you hoped, if not planned for.   The CEO of the team must ensure there is hope tinged with reality and that plans stretch but don't break after the buyout.

In addition to this, a management buy out taxes the support staff - legal, financial and HR up to the buy out but they are then expected to go into the back offices once again afterwards.  Those managers, often operational, who performed a small part in the buyout process will be then in the spotlight.  The CEO must recognise that his key people - even old and trusted staff - thrive on attention as all humans do. The buyout process causes this to be warped in many ways and the fall out can be dramatic.  The share each manager gets of the equity will magnify these concerns and ill feeling often makes key people leave the organisation.

So a Management Buy Out is not just for Christmas, it is a long hard slog. However, if you manage the strains and stresses and be prepared for the unexpected, Santa may well be delayed but his sack will be full enough to pay for Christmas ever after.

What to do when your Managers Do the Weasel War Dance

When ferrets are especially excited, they will perform the weasel war dance, a frenzied series of sideways hops. This is often accompanied by an arched back, dooking or hissing noises, or a frizzy tail. This is often the behaviour of senior level managers who encounter dramatic change - such as in a Management Buy Out of the business.


Although the weasel war dance may make a ferret appear frightened or angry, they are often just excited and are usually harmless to humans.  This is true of your Managers.  A natural human reaction to change is resistance and often even the most capable of people do not know how to express their feelings during this period.


In a Management Buy Out, more work and pressure is put on the buy out team.  There is an inevitable discussion of who in 'in' the buy out and who is 'out'.  At some point, those in the team will need to discuss how many of the management team's shares they will get personally and start thinking about what investment they are willing to make.   


So why the Weasel War Dance?


The leaders of teams should take care to spot the signs.  People will start to procrastinate and avoid making decisions - stepping from side to side just like the Weasel.   The need for accurate reading of body language is essential as people will often say the words without committing to them.   Members of the proposed team will seek each other out and try to measure up to each other - especially true when dividing the shares in the new business.   


As a leader of a potential buy out the main task will be to placate, install confidence and make wise choices.   The success of the venture will not be dependant on any one person, even the leader, so the team is all important.   There are bound to be people who consider themselves and the 'main man' or indispensable.  If that person does not work well with others in the team he may have to be dispensed with for the sake of the success of the buy out.


So, there's nothing wrong with a weasel and his funny little war dance.  Equally, expect some drama when organising a Management Buy Out.  Perhaps the only thing you wont see is a fizzy tail....

Get Rid of the Munching Cows before your Management Buy Out

Google earth has led to some interesting discoveries, one being that Cows, who eat all day long, either face north or south whilst eating.  Why?  No one knows, but they have always done it that way.

Now, look at your company before you perform a Management Buy Out, and look at what your managers do on a daily basis and ask, 'do they always eat North?'  Have they always done it that way?  Many tasks performed in a business are carried out as a matter of habit and process.  Often when you re-examine these things there seems to be no reason why they are still going on.

The 'Cows Eat North' principle in business is particularly true with businesses which have a longer history.  Processes can be developed more than 30 years ago - before computers and before cheap data storage - which still continue. Often businesses will have considerable resources employed just to keep these processes going.  Examples of whole departments existing on a bygone need are not uncommon.

When you are considering a Management Buy Out you must make sure that you don't have a bunch of munching cows in your business.

The best Management Buy Outs are those which detach themselves from their previous owners but which also re-examine every system and process to make sure it is still required in the new enterprise.  CEOs and Directors must be ready to shoot the munching cows in their own area of responsibility even if it does mean some difficult conversations.  It doesn't always mean the people leave the business, it may mean that those munching cows are trained to eat facing a different way.....but it isn't easy, after all, cows have been munching the same way since the first baby calf walked this earth.

Are you a Management Lion, a Lemur or just a Leech?

In a successful Management Buy Out you need a mix of Lions, Lemurs and, yes, even Leeches.

Lions are often called the Kings of the Jungle,  as they occupy the tip of the food chain spending 22 hours resting or asleep and just 50 minutes eating with just over an hour spent hunting. Their position comes as a result of what they are able to do and achieve.   In management terms, you need people who bring in the business, the hunters.  Before the buy out these people often get called lazy or feckless but a leader of the management buyout team may just need a few lions on their team even if they don't put the hours in that other people do.

Lemurs, charming little animals, have very full days, continually having to forage for food in the environment they are born in.  Often sociable, they search and seek - or farm - all day long. Equally, you need the people on the management team who keep things moving.  They may not have super brains (the lemurs have one of the lowest brain weight to mass ratios in the jungle) but their activity ensures survival.

Finally there are the Leeches, surely not a term to use in your management team?

Actually Leeches have been used for decades in medicine and are staging a comeback in modern medicine for specific cures or treatment.  A modern management team needs Leeches too.  All companies need non profit generators to keep them safe; compliance, finance, IT etc.   Often these people have great influence in companies before the buy out and leaders of MBOs are often tempted to cut these away when they buy out their business to reduce the costs (or even to get rid of annoying people).  However, if the non profit generating infrastructure of a business is cut too much it will leave the company exposed and companies with reputational, or legal or technical issues are very hard to sell on.

So the answer to the successful team for a Management Buy Out is to make sure you have an assortment of Lions, Lemurs and Leeches.  Who would have thought that?

There's No Room for Blind Fish in your Management Buy Out Team

Blind Cave Fish, which have evolved in totally dark underwater caves are, as the name suggests, totally blind. A similar thing happens in a company.  Many times there are Senior Executives who have been with the company a while and they know nothing other than the environment they are in. Like the blind fish, they are well fed, successful and function perfectly.  Take those fish out of the cave and they are in trouble and will soon loose their way.  Executives can be the same.

Very often C level executives earn their right at the board table by time served and being really very good at.....politics.  They have been in the right place at the right time.  Said the right things.  Often they are in the background, never violently disagreeing or agreeing, staying on the fence.  Quite often they are likeable and sociable.

In a Management Buy Out, however, there is no space for Blind Fish on the board.   The trouble is it is really hard to spot colleagues and frame them in a different situation than the one you have always been in.

A great Management Buy Out is one with a leader and a well balanced team - a mix between operations, sales, marketing and finance.  However, if you are the leader of the team you should take a long hard look at what your colleagues actually contribute to the success of the organisation.  Also, in order to make the a success of an MBO there will need to be extra effort, more work, sacrifices,cost cutting, renewed investment etc.

So, if you are considering a buy out it is best to set some tasks to your colleagues and see if they are able to get out of the dark cave on their own.

One test, for example, is to ask the sales director how he could grow the business by an extra 10% over the budget.  If the sales director is a Corporate Blind Fish he may say words like, "if I could do that I would have put it in the budget," or, "you know that's not possible, I don't have the support, ops can't do it." If you push him or her watch even more carefully.  See if he goes to someone else, a key member of his team, to do the work.  Look at his team.  Are there any managers there that would do the job better than him at a cheaper cost?   Remember, Corporate Blind Fish are often the easiest people to get on with, the ones who are good socially, but you'll need to put that aside for the sake of the successful Management Buy Out.

When a colleague and I were setting up a finance company with £115m investment we spent months on the business plan, putting together a team, winning over corporate finance advisors, lawyers etc. During this we put our team together and my greatest surprise what that we didn't bring over our peers from the the company we left, we had to look at lower grades, to the real workers, those with more hunger, a greater passions, more ambition, more practical skills.  Whilst an MBO has an established structure, it is not necessarily the one you have to go forward with.  The best advice is to advance with the team you want who can take it forward...... with one note of caution....

In a successful Management Buy Out you may have to be prepared to build a tank and create perfect conditions for some Corporate Blind Fish.  You may need certain people to help you gain the agreement of the current owners and you may have to take some star fish (ugh) to wow the future investors.  I could tell you a very good story about that!

Are You Management Chimp or Orang-Utan?

Few people take the time to think about what kind of managers they are and this becomes very important when considering a Management Buy Out - are you a Chimp or an Orang-utan? What sort of behaviour do you and your top team need to succeed?

Let me explain.  I worked in one of the world's largest Zoos for a long enough time to notice some of the real differences between Chimpanzees and Orang-utans.   Chimps are the most social of all the apes.  They live in communities and exhibit lots of behaviours such as grooming each other and even comfort each other. Orang-utans, on the other hand, are solitary creatures living in the trees and any loyalty displayed is between the mother and offspring.

When considering a Management Buy Out the Private Equity investor will seek a team.  Rarely do they rely on one individual.  They want to spread their risk over a number of key individuals.  Whilst this is the case, it is important that the team is rock solid.  They should analyse their own skills and seek to fill gaps from outside or in co-operation with their investor using a specialist recruitment agency like Equity Quest..

A set of skills and mix of people are not enough.  The MBO team must form a tight bond.  OK, there must be a leader and he or she may be able to climb higher and out perform the others, but if that leader turns into an Orang-utan he will soon find the strength of the team dissipates and be left high and dry.

The Management Buy Out team, even if that team consists of a mix of skills and abilities, (which may be reflected in the shareholding) will always stand the test of time if it is solid, loyal and the members get along socially.  I prefer Orang-utans - they are gentle, intelligent and kind.  However, even though this sounds quite, quite, wrong, I would always back a team of chimps because they are most likely to stand the test of time.

Note:  Orang-utans are endangered mostly because their habitat is being eaten away by development.  Chimpanzees are much higher in numbers - their major threat is hunting for bush meat.

I'm a Managing Director, Get Me Out of Here

Sometimes, when a Chief Executive or Board Director sends a CV to Equity Quest he or she isn't really looking for a new job more they are saying 'I'm a Director, get me out of here."

At Equity Quest we recruit Managing Directors and board level executives for Private Equity.   Private Equity will be looking for executives for their portfolio companies.  Some of the CVs we receive however are from people who are frustrated and tired of their present ownership structure and the lack of investment.

Perhaps sometimes Managing Directors and other directors should consider staying put and buying out their business in a Management Buy Out and take control of their futures'....and perhaps make themselves handsome returns in the short term future.

As a rough rule of thumb, for a business to be bought out using Private Equity and bank funding, there needs to be profits or potential of profits in excess of £2m p.a.  However, businesses in deep distress will also be considered if there is a rescue plan and potential of great returns. Small businesses in distress probably wont qualify.

Financial backers will need to be sure the buy out managers have the skills and experience and can fly on their own without the support of the previous owners.  Should there be a skills gap, you, your advisers or even the Private Equity firm may introduce an external candidate. They will turn to specialist companies like Equity Quest to search the market for people who can work both with management teams and their private equity backers.

MBO teams often comprise of 3 or 4 individuals; a Managing Director, Finance Director, Sales Director and Production/Operations Director.  Assembling this team is often the hardest.  Maybe it is one of the directors the potential MBO leader doesn't see eye to eye with.  Again, there needs to be a consideration of filling gaps for whatever reason they exist.

Of course there are many steps an MBO team should take to a successful buy out. But the first is the biggest; are you a Managing Director and do you want to Get Me Out of There.....or is it worth staying around and becoming the king of your own jungle?