Diary of an MBO

For executives dreaming of escape, buying the company they work for is a popular route to self-determination.

Last Updated: 09 Oct 2013

But what's it like? Julian Hough of newly independent advertising agency WCRS shows Dominic Mills his diary of an MBO.

As he cycled in from Blackheath to Soho on 22 April 2003, 41-year-old Julian Hough, one of five top executives running advertising agency WCRS, knew he could be in for a momentous year.

His dilemma was one faced by most successful business people sooner or later. Should he sign up with his current employer - WCRS parent company Havas - for a few more years, or head off for a new firm and a new challenge? After 21 years in advertising - the past few at WCRS having been phenomenally successful, with work for BMW, First Direct, Debenhams and the 118 118 runners campaign under his belt - he knew he wouldn't be short of offers if he left. But most would amount to more of the same for a different multinational holding company.

Besides, he really liked his senior WCRS colleagues; together, they made an unusually stable and cohesive top team. At 59, legendary founder Robin Wight was still going strong; chief executive Stephen Woodford, 44, had been there eight years, his second time at the agency; creative director Leon Jaume, 48, was on his third spell at WCRS; and planning director Debbie Klein, 35, had been there six years.

How could he find the challenge he craved but continue working with the colleagues he liked and respected so much? Little did he know that those very colleagues were also considering their options, and that the solution to their joint work dilemma might be a management buy-out.

22 MARCH '03

Stephen and Robin call me in, looking incredibly excited. They have decided that the time could be right for WCRS to buy itself out from Havas. Like everybody in advertising, we've entertained thoughts of doing our own thing, whether a launch, a breakaway or an MBO. Now it might become a reality.

'We want to do an MBO,' they say. 'Do you want to be part of it?' They have already made contact with Peter Scott (one of the co-founders of WCRS and, having taken WCRS public in 1984, well connected in financial circles). Scott also believes the time is right.

I'm pleased he is on board. He's successful, he understands advertising, and he speaks finance to a level that none of the rest of us can claim to. The plan is for him to take a stake, too.

From the prospect of limping towards another personal five-year contract, I feel instantly excited. I will have to take hefty cuts to salary and pension, but at home Catherine (Hough's wife of 15 years) is immensely supportive. She can see what a difference the prospect is making to me. As a doctor in the NHS, she is exceptionally grounded - a useful antidote whenever I spout adland rubbish.


Things are moving fast. With Scott, we appoint LongAcre Partners as our corporate finance advisers and Osborne Clarke to handle the legal side.

We meet LongAcre's Jonathan Goodwin and Marcus Anselm - they specialise in media deals, so that's a plus. And they are based in WCRS's old office in Covent Garden. They've christened this Project Cruise - not sure whether this is Cruise as in missile or relaxing, sun-drenched, ocean-going holiday.

Leon and Debbie are also in, and we all decide to meet for breakfast every Monday morning. We are the obvious five, as we represent all sides of the business. There are others we want to involve, but at this stage we keep it as tight as possible - we don't want news to leak.

Osborne Clarke take us through the contractual and other obligations we must continue to observe - salutory. We must ensure at all times that we don't infringe our duties as directors.


Heavy meeting about process, strategy and pricing. I'd like to say I am getting familiar with the jargon, but in truth I'm just faking it. There is much talk of 'mezzanine debt, senior debt', 'standing in line', 'deferred consideration', 'heads' and 'crossing the rubicon'.

Someone offers the analogy of divorce. Once you have told your partner you want a divorce, you can't go back a week later and say: 'I've changed my mind'.

Our timing seems good - Havas is on the point of a major reorganisation, which will result in the consolidation of its UK agencies. WCRS may not be a central part of those plans and they might be willing to listen to us.


As we prepare to make our move, we are reminded again to be clear about our contracts and fiduciary duties. More jargon, including the marvellous 'Nuclear One' and 'Nuclear Two'. Nuclear One is when a management team attempt an MBO. Nuclear Two is when the parent company turns them down and they all walk out.

They also tell us about something called a 'golden shower' - when the parent company rains down money on the management team to discourage them from doing an MBO.

Stephen is planning to visit Ed Eskandarian, the Boston-based executive who runs Arnold Worldwide Partners, the Havas division in which WCRS sits, so this is important stuff. Some parent companies become very aggressive and heavy, so it's possible that Stephen could be dismissed on the spot, followed by the rest of us the day after.

What about the walk-out? None of us is very keen on this. We don't want to do anything that isn't amicable, or something that could hurt the 150 staff or our clients. Also, on a personal note, we're all in long-term relationships with kids and things - we're just at the stage of life where it's not really an option.

However, a rubicon is about to be crossed - there is an emotional session at LongAcre's offices, where there is much shaking of hands and manly hugging. When Stephen steps on the plane there will be no turning back, we have to remain absolutely solid as a team. If there are any cracks they will be spotted and the deal will fall apart.


Stephen rings from Boston. He didn't get fired, it turns out, so there's a huge sense of relief among the team. Stephen is back. We meet at LongAcre's office on the Sunday night with our advisers. Ed's response to Stephen was considered and wise. His reaction: 'I'd really rather you didn't try to go through with this, but I will put your proposals to the Havas board. In the meantime, make sure that day-to-day business doesn't suffer - and don't be distracted by all the froth and excitement.'

This is probably the best we could have hoped for. I think Ed believed we wouldn't all walk off, and he could well have called our bluff. But he's an experienced agency manager and he knows that if the management is disenchanted, the business will suffer. And he was a successful entrepreneur himself. Robin tells me that when WCRS was a public company in the '80s, he and Scott bought what was then Ed's agency.


A series of meetings about price, equity and financing. We are trying to do the deal with a vanilla loan - a lot like a repayment mortgage, where you make interest payments regularly and capital repayments when you can. We are all very anxious to avoid the venture capital route. We also have to establish how much we can all raise - it makes a huge difference to the banks to see a high level of investment from the founding partners and a significant sacrifice. I suppose this is where we really get down to the nitty-gritty.

Amazingly, not a word has leaked - perhaps because all meetings are held during out-of-office hours and off-site, either at LongAcre or at Osborne Clarke.

We've agreed that if anyone asks why we're always heading off to secret meetings, we'll say we're doing an acquisition.

On price, the real issue is how to value a business like WCRS. Do we do it on the basis of the past 12 months' profits? Or an average of the past three years? Or do we agree a floor and a ceiling based on future performance? Thank goodness Peter is involved. I don't know where we'd be without him.

The equity split. Well, this is fun. Everybody - me included - is saying: 'It's not about the money, but we have to talk about equity.' Bollocks - of course it's about the money. We are all sinking a big chunk of cash into the deal and want to see a decent return. The truth, however, is that the equity split among the management team gets massively diluted anyway. Whether I get X% or Y% is irrelevant if the business is not performing. The annual growth figures and exit valuations seem to have the biggest influence on future value.

The first proposal is based on seniority and salary, putting me last. I feel very strongly that it should be dependent on what we'll all be doing in the future rather than what we may have done in the past. This highly moral position may have something to do with me being the second-youngest in the team.

After four or five meetings, we agree on the simplest solution - our share is split equally six ways, with Peter as the sixth partner. We also decide to reserve significant equity for other members of the agency team and for staff.

Our building has six floors, and on the way home I think: 'On a six-way split, one of those floors is mine.' Of course, that's rubbish, but it's still an exciting thought. The truth is that I've got a taste for this deal now. I really want the MBO to happen.


Letter from Ed confirming the Havas board's view of the price range - strangely, different from ours. But there is a catch - they have not agreed to sell, merely agreed a price-range if they were to sell. The headline price - £20 million - is more than we want to pay and makes funding very tough. We agree a solution that means we have to find 'only' 75% of the purchase price, as Havas has agreed to keep a 25% stake. This arrangement is a win-win for both of us. We get our independence, they keep a London office for the Arnold Worldwide Partners network. We will work with AWP on Danone's Volvic brand and with Toshiba, and Glaxo's Niquitin arrives the following February.

On a personal level again, by the time I factor in a cut in salary, the absence of a long-term incentive plan, a lower pension and having to forgo future salary rises, I'm looking at reducing my income by about 50%.

Catherine is very supportive. My parents are concerned; my father, an accountant, always wants to know if I am 'protected'. I'm not quite sure what he means, so I tell him I am.

To raise my share of the money, we re-mortgage the house. I can manage this. We've never played the property market, and have lived in the same house in Blackheath, south-east London, for 10 years. We now have a massive mortgage, but structured so that my incomings and outgoings match. Only I'll be about 105 before I pay it off.


I faced another big personal challenge during this period - L'Etape du Tour. It's the cycling equivalent of the Marathon and I'd been training hard. On 15 July I flew down to France with my brother and some mates to join 8,500 other riders to cycle across the Pyrenees from Pau to Bayonne. It was the hardest physical thing I have ever done in my life. I had to maintain an average speed of about 20kph for 200 kilometres. I finished exhausted and elated, feeling that if I could do that, then I could do anything.

Multiple meetings follow with the advisers, about equity for the staff, valuations, business models, funding and so on. I never realised an MBO could be so complex, especially in what I always thought to be a simple business like advertising. It's miles worse than buying a house.

In the early stages of the talks, we'd taken to meeting at the private dining room in Deca, a restaurant in Conduit Street, near Holborn. Then we realise how expensive it is and it suddenly seems very inappropriate. After all, this is our money! The weather gets hotter, and I look forward to joining the family on the Isle of Wight, where they are spending the summer.


Disaster. Bloody Campaign (weekly ad industry magazine and sister title to MT) has splashed our MBO all over the front page. Where they got the story from I can't imagine. We had agreed absolutely no publicity with Havas.

Stephen, who is on holiday in Cornwall, and I agree we have to call the clients and address the staff. Having been on my bike from the ferry to the house, I turn round and start pedalling hard. I end up calling Val Gooding, chief executive of our client BUPA, from the ferry.

Some of the staff are a bit shocked. Although many of them don't feel a strong connection to Havas, this is nevertheless a shake-up.

Clients, however, are very positive. They know an MBO means they'll get the full attention of the top management and account servicing, the likes of which they won't have seen before. There's another plus too. If any clients are going to go because of the MBO, it's better for us to know now.


Now we're into serious money-raising. We agree that Debbie, Leon and I should continue to focus on clients and run the business, while Stephen, Robin and Peter handle the banks. They spend hours working on the model and rehearsing. Presentation is what we do for a living - but not normally with numbers.

Negotiations with Havas continue in parallel. At this point we need to be super-confident about our business and prospects, but we're suffering from self-doubt. Apart from a Heinz project and the DTI minimum wage campaign, we haven't won any significant business this year. It's not that we haven't been pitching, just that our conversion rate has fallen through the floor. Lots of mutterings about management being focused on the MBO at the expense of the day-to-day. Truth is that we pitched for too many projects at once and did not do justice to any of them. I'm still spending a lot of time pursuing the mobile phone company 3, one of the biggest advertisers in the UK. I'm convinced that we can do a better job than the incumbent.

We think we have a good chance of winning the 3 account, but we can't factor that in. So we can't provide the certainty that the banks like. These days, a lot of our income is performance-related. Yet we can't say to the banks, 'They've paid us a bonus every year so far'. They won't lend on bonus income. It's frustrating.

At least the 118 runners are doing the business, and we'll get a good bonus for that. It's amazing how a successful and famous ad campaign generates great PR for us.


Camelot, our biggest client, calls a statutory review. It's a double-edged sword. It's a blow, but better now than after we'd bought the business.

We decide not to re-pitch, effectively resigning. It's the best decision we can make. We need to focus on the MBO and keeping the clients who want to be with us happy, not fighting a rearguard action that would probably be futile.

Unfortunately, it doesn't reduce our purchase price. The valuation is over the past three years, not the past three months. It means that the new business target in our figures is even more of a leap of faith. This is also the time when we have to make some redundancies - not a high point for any of us.


We decide to go with Barclays. It's straightforward: we just have to meet the repayment schedule. The bank's security is the fact that we've all put significant cash, borrowed on our houses, into the deal. And we're last in line in the repayment queue. I realise the difference between being an employee and employer: employees can walk away when they like.

But there could be a funding gap. We meet other institutions to see if there is a way to supplement the debt with equity finance. The VC route raises its ugly head again, but we reject it. The solution, apparently, is to find HNWIs - high net worth individuals. I learn more finance speak. 'The bank is firming up its assumptions' means it is getting more confident with our business model. When banks say, 'Hmm, that's interesting', we think, 'Let's run for the hills'.

After we do yet another remodel and the rest of the management team take up their shares - we've reserved a portion of the equity pool for them - the gap falls to less than £1 million.

In the end, 26 sign cheques for shares, pretty much the entire management board. Now they are partners. We're delighted - it means we've got a wider ownership structure than any of our competitors. The response is brilliant, with people weighing in with as much as they can.

It's a huge vote of confidence. The staff are behind us, AWP is behind us and Havas is hugely supportive. At the beginning there'd been lots of macho stuff about 'blood on the carpet' and 'no turning back'. In fact, as the deal progresses Alain de Pouzhillac (le grand fromage at Havas) and Ed Eskandarian just want the deal done.

But it is going on forever. We were warned it might take six months, but it's been nine. There have been times when I thought it wouldn't work, and I have always been prepared to walk away from the deal and soldier on.

Delays notwithstanding, I feel much more confident. We are winning awards, and 118 118 has just been named Campaign of the Year. I feel reassured that what I am buying is worth it.


More legal stuff. We have to tie down our own contracts, voting rights and so on. We all have the same contracts, and we have all cut our salaries, but we're not paid the same.

Then there is the Havas legal stuff. With Havas staying in for a portion, the MBO has become an MBI - management buy-in. Thankfully, it doesn't feel any different. Part of the new arrangements include what the lawyers describe to me as an anti-embarrassment clause, which is a new one on me. It's a bit like a pre-nup, and is designed to stop us doing anything against the interests of Havas, like immediately selling our stakes in the agency to another group.

We are pitching for Phones4U, so there is a lot of travelling up and down to Stoke-on-Trent. On the train, Robin, Leon and I discuss a name-change. I'm keen on an alphabetical arrangement - this, of course, has nothing to do with the fact that my name would be first. But no-one would remember the new acronym and it could take 25 years to build a name as well known in the industry as WCRS.

Leon and I discuss calling it 'New and Improved WCRS'. This would capture the spirit of the change, and it would be very funny if every time a journalist wrote about us they would be forced to call us New and Improved WCRS. We wish - fat chance.

Still, we agree on a new tagline, WCRS - a brand's best friend (developed by Dave, our new brand identity subsidiary), as part of a new corporate ID for the new WCRS.

At last we all sign off on the terms. Now we just have to wait for the lawyers to sort a few things out - a bit like the period between exchange and completion when you buy a house, except that the mound of paperwork involved has become as big as a house.


At last. Without a hint of irony, the deal goes through on April Fool's Day. We are over at Osborne Clarke most of the day - the atmosphere is tense, there are last-minute hitches and lots of nervous laughs. I never believed it could be so time-consuming or complex.

I wonder if I have changed. I'm certainly more focused. I now worry about things I never thought about before, like aged debtors. I ask myself all the time, 'Are we giving our clients good value?' I want to make sure our people are more professional. And I know that if you travel after 11 minutes past 10 on a weekday, it's £40 for a return to Stoke.

But we now have total freedom. As part of a multinational group, we sometimes found ourselves running unprofitable accounts. Now we're not. We refuse to pitch. I turned down a client who asked us to continue working on a project that had dragged on and on. I thought, if I can't tell them to get lost now, when can I?

As a management team, we now run as a pack. If I get in first, I make tea for Stephen and vice versa. Neither of us ever discussed it - we just started doing it.

FOOTNOTE: On 13 May WCRS won the 3 mobile phone account. With the Phones 4U win, the agency was propelled to the top of the New Business League.

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