Fraught With Danger - A management buyout may fail for many reasons between its conception and completion. What are the most common pitfalls?
By Andy Nash
As chairman of Morgan Grenfell private equity, Lord Robert Smith said he backed three things in a management buyout (mbo): management, management and management. Good management can improve a poor business, but a poor management team can wreck a good one. so how do investors spot the difference? commercial due diligence on a management team can help, but it does not eradicate risk. a small minority of managers lie in their desperation to get the deal done, often with disastrous consequences.
Some businesses run by autocratic ?owner drivers? are highly successful.
but when the driving force of the business is removed, what remains is not necessarily a well- oiled management team, but just several direct reports. the exiting powerhouse may have anointed his successor. but a lack of authority, ability and respect from the rest
of the team can mean that the chief-elect is ceo in name only. and this may not become apparent until the deal is well under way, as the new team will have been kept under wraps.
unknown unknowns one-off events midway through an mbo can be a short-lived change in circumstances or an event that alters a business?s trajectory. if it?s the latter, this often gives rise to an unbridgeable gap between the vendor?s value aspirations and the purchaser?s appetite for risk. even if the management team can reconcile themselves to the changed circumstances, conveying it to their backers could be a challenge too far.
Business plans that detonate deals during their gestation period are pretty rare, as backers scrutinise financial histories, major assumptions and strategies before entering the period of exclusivity. but it can happen when due diligence uncovers unjustified optimism or,
less commonly, sleight of hand. Whether to proceed is a judgement call for the backers and prospective management team.
The unpredictability of backers delivering the hard cash is a major consideration. the risk- averse mindset of funders has changed the game since the recession took hold. before, there was just a nod to these concerns. the reduction in the quantity and value of deals being completed is eloquent testimony to the challenges of obtaining funding in the current market.
The latest edition of Andy Nash?s book the mbo guide for management teams
is published this month by Harriman House. Since 1997, Nash has had a portfolio of non-executive directorships.