You feel unloved and frustrated: the business you're running has huge potential but the parent company doesn't seem interested and there are rumours that they're looking to sell. If ever there's a time to mount a management buy-out it is now. But the stakes are high: get it wrong and you could bankrupt yourself and lose your job.
EXAMINE YOUR MOTIVES. The most important reason to do an MBO is to build yourself some capital, according to Mark Perchitti, private-equity partner at accountants Deloitte & Touche. Other reasons are a desire to run your own business and escape the meddling clutches of a parent firm. The most common MBO situations are those where the business has become non-core to its parent, or where a private owner of a family business is retiring. Be wary, though, of regarding a management buy-out as a way to protect your job.
CHECK THE FEASIBILITY. MBOs are invariably leveraged by outside finance, so you need a strategy to sharply increase profits - say, by cutting costs or by expansion - enabling you to service debts and significantly boost the value of the equity a few years down the line. Consider whether finance will be forthcoming and whether the business is viable as a standalone.
PICK YOUR TEAM. There are three important factors in an MBO, says Tom Lamb, managing director of Barclays Private Equity: 'Management, management, management'. Typically, the team consists of a chief executive and three or four directors, but larger deals may bring in lower tiers. There is no room for sentiment. 'You may have someone who was fine as financial controller of an operating division but is not up to being FD of an independent company. If your financiers conclude so, you'll lose credibility.' Bring in external talent and you have a BIMBO (buy-in management buyout).
GET CONSENT. Approach the owners or parent company with your proposal and ask for permission before you disclose any confidential information to venture capitalists or banks. Otherwise you risk being turned down and getting your marching orders.
SHARE IT FAIRLY. Mike Wright, director of the Centre for MBO Research at Nottingham University, says management's share of equity ranges from 60%-65% in small MBOs to 5%-10% in large ones, but warns it's a mistake to get hung up on the equity stake. 'There has to be a good incentive in it for everyone,' he says. Management will be expected to invest about a year's salary. 'Financiers will want you to put in enough that it would hurt if you lost it, but not so much that you'll be constantly worrying about it.' BEWARE OF BUYING HIGH. It may be easier to raise the capital when business is booming, but paying over the odds is one of the biggest risks you face. 'If you buy at the peak of the market, you may find it difficult ever to make money,' says Lamb.
KEEP YOUR HEAD DOWN. It's best to keep a low profile until your MBO is pretty much signed and sealed. If your interest becomes more widely known, you risk starting an auction, in which case the price will go up. And customers, employees and other stakeholders may become nervous if there is a prolonged period of uncertainty. If there are key customers or suppliers whose ongoing commitment you require, wait until the last minute to talk to them.
DON'T BURN YOUR BRIDGES. If your MBO fails for whatever reason, you may find yourself working with the same colleagues and the incumbent owners of the business. They won't thank you if you have denigrated their abilities or commitment.
DO SAY: 'We believe this management team has the entrepreneurial flair to achieve rapid growth as a standalone business.'
DON'T SAY: 'We'd better buy the business before someone else does and finds out what a dog's breakfast it is.'