Maximising value from an MBO – from private equity investment to exit

Matthew Pomroy

By Matthew Pomroy, investment director Foresight Group

There are many attributes that give rise to a successful private equity backed management buyout (MBO) and eventual exit. Foresight has backed six MBO transactions in the last 12 months. Within the same period, we have also successfully exited two MBOs; Clubhouse Golf and Hedges Direct, both delivering strong returns for the management teams we supported.

Based on our experience, there are three key things to consider if a team is looking at an MBO.

The first is choosing the right partner. The investment journey will typically last several years, so it is vital that the relationship between management and the investor is right. Spending time getting to know an investor prior to commitment and speaking to other management teams they have worked with, is a good way to build a relationship with a potential investment partner. It also isn’t just about the investor. The right investor will commonly introduce experienced non-executive directors to help develop and grow the business. Getting the right team together can make a material difference.

The second key feature is growth. This is not solely about increasing earnings, it is about building a growth story to drive the business through its current ownership and beyond. Developing a clear, concise and achievable strategy – on which both investor and management are aligned – will maximise an eventual exit valuation. Issues commonly arise where the story is overly ambitious or where the detail is poorly thought through. The right partner should work through the detail to ensure alignment. The exits of Clubhouse Golf and Hedges Direct both demonstrated strong profit growth, driving premium valuations on exit, underpinned by a detailed, achievable story.

The third aspect to consider is planning. Investors spend significant energy on making investments but often an exit is driven by market opportunity or an unsolicited approach. At Foresight we look to plan for the exit from day one, developing a plan around management’s timing objectives, understanding the potential future buyer landscape and positioning the business in the right way. Exit processes often take time. Planning is therefore important and should be started early; allowing management to focus on the day-to-day running of the business to deliver strong trading results through the exit process.

The right exit is critical to securing value for both management and the investor. It is always difficult to know when the right time is to sell. Are we exiting too soon? Have we held on too long? Perhaps nobody will ever secure the “perfect” exit but with the right partner, growth story, and a well thought through plan in place, management teams can maximise value from their MBO journey.