Senior executives buy-in to a business vision

Identifying the right target company is crucial

When key managers decide to invest in a business and take over its running, this is called a management buy-in (MBI). Management buy-ins have become increasingly popular in recent years, driven by the fact that many senior executives have found themselves frustrated with the limited number of opportunities for advancement available where they are. Typically, they pull together one or more like-minded colleagues and secure financial backing after identifying the right target company to buy into.

The banks and other financial institutions that provide funding will reject unsuitable candidates, and it does not follow, that every director is capable of mounting a successful management buy-in. In more recent times due to uncertain economic climate there has been a considerable restructuring taking place throughout industry which has resulted in many directors taking pay-offs and going into early retirement much earlier than they would have ideally planned.

Once a suitable team is put together and the ideal target business is found, there's no guarantee of success. It can be a lengthy, drawn-out and stressful process. You need experience and you need to show you are capable of high achievement. Relevant sector knowledge is crucial, otherwise you could find it difficult to convince a backer that you're the person for the role.

Quick guide to MBIs

1. Relevant experience at managing director level.
2. An ability to generate increased profits in a business.
3. Relevant sector experience
4. Excellent negotiating skills.
5. Strong financial skills.
6 Resources of at least £80 to100,000.
7. Sound commercial judgement and vision.
8. Aged less than 55 but more than 40.
9. You need to look the part too, good communication and presentation skills are essential as you have to convince sceptical bankers that you can do it.

To mount a successful MBI you initially need to identify a target business, one that's based in the right place, is in the right kind of industrial sector, is operating in a high-growth market and is the right size.

You need to take professional advice and draw up business plans to present to the financial backers. Funding has to come from a combination of the executives themselves and the backers. The management team has to put in a meaningful investment, not necessarily a huge one but something that represents a significant commitment.

Choosing the right venture capitalist is essential and it's important that the repayment terms are sensible so as not to hinder the daily running of the business. Typically, you find that venture capitalists normally insist that first year’s pay is no greater than the sum invested by the managers concerned.

Venture capitalists will typically expect to get their money, plus growth, back after about three to seven years in to the MBI. The business 'exit’ strategy would normally require the business to either be floated on the stock market, sold to another business or sold to another financial buyer.

In an ideal scenario, the team that buys in to the business has between three and seven years to achieve what it set out to do and prepare the business for the next step of its life, to ensure the financiers are repaid and the business itself goes on to bigger and greater things.

esmartmoney
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