Running a business better than your boss

Management buyouts and buyins have pitfalls as well as bonuses, says Roger Trapp

It is a rare employee who does not think he or she can run their company better than the existing management. However, even those fairly high up in the organisation rarely get the opportunity. This is generally because the enterprise is not for sale. But even if it is, a lack of finance can put a brake on such ambitions.

This is where leveraged buyouts come in. Basically acquisitions largely financed by borrowing that is supposed to be paid out of future cash flows, they are increasingly being used to put management in control. According to figures from the Centre for Management Buyouts Research, management buyouts and buying activity has increased dramatically over the past 15 years. Last year 537 such deals, worth pounds 3.4bn, were concluded.

As the accountants Coopers & Lybrand point out in a recently published guide on the subject, many managers have already become wealthy by buying the business they used to manage, or buying another business and improving performance. However, not everybody who goes down this road emerges happy and rich.

The guide is designed to increase the proportion who do. In particular, the firm stresses that management buyins (MBIs) - where a team of managers is supported by financial institutions to acquire a business it reckons can be improved through its management expertise - are essentially a different proposition from management buyouts (MBOs), where the existing managers acquire the business from its owners.

It says MBIs are traditionally riskier than MBOs for a variety of reasons:

nAn MBI team does not have the "inside knowledge" of the company that an MBO team does, with the result that the plans might go wrong.

nSellers of MBI targets are often less inclined to do a deal than they would if an MBO team was involved. This reduces the chances of the MBI team obtaining the business on favourable terms.

An MBI might require greater preparatory work in identifying a suitable business to buy and putting together the finance and the team, which also diminishes the chances of a successful deal.

However, this does not mean a deal can be done. MBOs and MBIs take place in every type of industry and they come in all sizes. Success is largely down to the quality of the management and its ability to work together, says Coopers & Lybrand. But suitable targets tend to fit one of the following categories: non-core businesses, profitable or potentially profitable subsidiaries of a cash-starved group, businesses that do not generate sufficient returns on capital employed, and family-owned businesses with succession problems.

The next stage, of course, is obtaining the finance, and here Coopers & Lybrand plays its card. In line with other large accounting firms, it has made great strides in corporate finance recently - picking up deals that the merchant banks have traditionally shunned as not being big enough to be worth their while.

In the past three years, it claims to have acted in more than 30 per cent of all British management buyouts and buyins by value. It has been lead adviser in 130 of the deals in which it has acted. But despite this prominent role, it does not have direct access to funds: it merely advises businesses on where to obtain the money.

And here begin a whole new series of hurdles, including persuading would- be investors that the business plan is sound, and satisfying their due diligence investigations. And that is before you even sit around the table to hammer out a deal.

Still interested? Contact Coopers & Lybrand, or indeed any other large accounting firm, in London or at one of the regional offices.