Ten Top Tips: Get the cash for your management buyout

For management teams looking to take control of their businesses, private equity can be a key way to get hold of leveraged debt. Ian Sale, MD at Lloyds Bank Commercial Banking's Acquisition Finance team, has these tips for convincing the PE guys to give up the goods.

by Ian Sale
Last Updated: 22 Oct 2018

1.      Are you a special snowflake?
To attract private equity interest and the debt to support a buyout, you need to have a unique proposition. Management teams will not only need to articulate their position in the market effectively, but also provide the confidence that their business model is defensible, with sufficient barriers to entry for new competitors. Fully protecting key intellectual property is an important step in securing your industry position.

2.      Growth is key
A clearly defined growth strategy is at the heart of any investment proposal. Private equity investors and banks will want to see the future of businesses mapped out. Being able to point to strong market growth dynamics and emerging opportunities, as well as potential challenges, will help attract the right interest.

3.      Who’s behind the business?
Private equity backs management teams, not just businesses, so it is absolutely paramount that management can demonstrate a solid track record of achieving organic growth, a broad skillset, technical expertise and in-depth knowledge of their given industry.
Lenders place great emphasis on relationships, and work with businesses that promote clear and open lines of communication. These close ties enable lenders to act appropriately and provide additional support if required.  Taking a long-term approach, as well as being transparent and enthusiastic, will help to nurture a successful partnership.
4.      Have some skin in the game
Like private equity investors, lenders are keen to see management teams demonstrate they are committed to the business and to help deliver its growth plans. By putting up some security or taking on an equity stake, it is clear that a management team is in it for the long-haul. If an influential director is keen to realise their entire stake, it doesn’t fill a bank with confidence.
5.      Get the price right
Pricing expectations between businesses and investors have realigned in recent years in response to the new economic landscape. Management teams need to give a valuation that ensures that they retain an incentive to push forward with growth, but also be aware that investors need a large enough slice in a big enough cake to receive an acceptable rate of return on exit.
6.      Patience is a virtue
Since the financial crisis, one of the main complaints in the dealmaking community has been that transactions are taking much longer to ‘get over the line’.  It is important to be patient and professional as longer transaction timelines are now the norm. Make sure that quality advisors are in place to lead you through the process and can make sure that you get in front of the most appropriate private equity houses and banking partners.

7.      Be prepared for due diligence
To speed up the process, businesses must be prepared for a thorough due diligence process, which will ask serious questions of their financial and operational state and forecasts, and work with advisors to prepare all the relevant information and documents well in advance. It is also common for due diligence to be carried out on management teams to make sure that their personalities are compatible with each other and investors.

8.      Demonstrate robust cashflows
As part of the due diligence process, banks are interested in businesses' ability to manage cashflow effectively and show stability. With a veil of uncertainty hanging over the economy as it balances precariously between recession and recovery, there is a good chance that a business will be confronted with serious challenges in the near future. Without a history of a robust working capital cycle, companies will struggle to convince a bank that it can meet its debt obligations when the ‘going gets tough’.
9.      Protection
Investors are looking for a stable business that won’t spring up any surprises. In particular, firms must ensure that they have a broad supply chain without a reliance on any single provider. Hedging against increases in supplier costs will also help to reduce the apparent risk.

10.  Keep customers sweet
Private equity investors and lenders are keen to see recurring revenues within businesses. It is important that they come from a diversified client base with long-term stable contacts, so that obvious business risks are mitigated. A firm cannot be over reliant on one large contract. Be prepared for the due diligence process to look into customer/client relationships and request references on your performance.

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