Bad Eggs Don’t Make Good Omelettes

What leads managers to consider the MBO option?  In some cases this is triggered by the current owners seeking an outside acquirer.  Managers may not want that change of ownership as it might reduce the autonomy they currently have – or indeed possibly lead to the loss of their jobs.  It must be said that investors quickly identify MBO’s where the main rationale is “self-preservation” and needless to say are not normally minded to support such situations!  However, if the management are confident of their ability to grow the business and they believe that their talents will not be utilised in the best way in a larger group then a positive attitude will be taken as to their intentions.  In a similar vein it may be that management currently feel that the actions of the owners are causing unnecessary bureaucracy or are motivated by their personal goals which may not be congruent with those that will benefit the business in the medium term.

The “greed” factor may also be present.  This is rephrased by financiers by their like of management teams that are hungry for success!  This is a positive feature as it may well be that rewards have not been going to those responsible for success leading to management being tempted to leave the business – which in turn suffers.

A combination of these factors may lead to management considering an MBO.  If they do – are they up to it?  Financiers, who will usually be providing the vast majority of the funding necessary will look at specific areas where experience has shown that the right profile leads to the best chance of investment success.

Firstly, teams are preferred to individuals.  Individuals run a far greater risk of being hit by the proverbial truck or of suffering from tension induced stress.  By contrast, teams leave the investor less exposed to individuals leaving for whatever reason; bring a broader range of skills and experience to the situation, and allow group discussion to facilitate better decision making.  The phrase “a problem shared is a problem halved” is relevant here.  Having promoted the benefits of a team, this should not be so large as to impede decision-making but should ideally cover all the key aspects – sales, marketing, production, distribution, finance and administration.

Private equity houses also look to see serious commitment to the “new” business both in terms of exclusively dedicating management time to it and investing sufficient of management’s’ own funds to ensure that they will suffer a degree of pain if the venture does not prove successful.  This “pain threshold” is highly variable and is normally adjusted to the personal financial situation of each of the key players.  As this may involve commitment based on the marital home it highlights the need for support from the families of the buyout team.  The effects on the family can be a requirement for (even) longer hours of work particularly in the early stages of ownership and the acceptance of lower incomes and hence standards of living for the family in the short term.

Other essential requirements are both the willingness and ability to take risks, remembering that their entrepreneurial instincts may now be tested in the marketplace for the first time.  Clear leadership is required with a team each of whom has a key role to play in the future success of the business.

While the strengths of the overall team are critical, strength of personality is often considered the most important attribute in deciding on the team leader. “Team culture” is really important to the future development of the business as there is a frequent need for a climate of change following a buy-out as hearts and minds have to be won over.  Successful MBO’s have a proactive, supportive and group oriented culture.  They should usually be moderately aggressive and averse to complacency or static thinking – excellent features we would recommend in all businesses!

Finally, the team must ensure that their chemistry combines well, and should realise that their talents and personalities will be liked by some financial backers and shunned by others.  Managers should therefore ensure that their advisers are in a position to judge those institutions (or individuals within those institutions) who are most likely to “gel” with the team.

These features, drawn from our own experience and that of others, in turning managers into owners since 1984 illustrate the importance of how managers must assess their own personal abilities and aspirations as undoubtedly if you start to work with bad eggs – you get rotten omelettes!