Buyouts rise on higher-tax fears

FEARS of higher tax rates under a future Labour government are leading many family businesses to sell out to their managers, and are partly responsible for a continuing increase in management buyouts.

Figures released by the Centre for Management Buyout Research at Nottingham University show significant growth in the number of private companies sold off last year. Management buyouts (MBOs) of family businesses rose by a third, to 141.

Steve Utting, a partner at Price Waterhouse in Nottingham, says fears of tax increases are a factor encouraging the sell-off of family businesses. "The awareness of MBOs is becoming more widespread, the economic climate is more favourable at the moment, and political uncertainty is making some people think about the future of their business. More private companies are considering disposal to a management team, and lower interest rates are making it more viable."

Chris Ward, head of MBOs at Touche Ross, says interest is unprecedented. "We are very buoyant - completely flat out. There are a number of very large buyouts underway.

"I predict that 1995 will be the record year. There is a huge amount of money in the venture capital industry. Venture capitalists are often acting as the principals, and frequently bidding against each other.

"During the recession, the sale of private companies was delayed until the prices picked up. The looming election may also be encouraging owners to bail out."

Ken Robbie, a fellow at the Centre for Management Buyout Research, says that rationalisation within multinational corporations has also caused many of the sales. "There is quite a lot of large divestments by major corporations like Thorn-EMI and BP. There are enormous variations from year to year in the industrial sectors involved. Last year, it was electrical engineering, paper, printing and publishing. In the early 1990s, it was business services.

"There were a lot of crisis sales a few years ago. Now there is much more considered structured divestment going on. There is more pressure on venture capitalists to pay very full prices. Businesses are returning to core activities. There has been a lot of divestment in overseas-owned companies in the past few years, particularly where domestic economies are under pressure."

MBOs offer one of the most likely routes to becoming a millionaire - short of being a director in a privatised utility. In a study of 55 MBOs that were subsequently floated, Nottingham University found that 111 of the managers had become millionaires. Of pre-1988 MBOs valued at more than pounds 10m, more than 85 per cent of the management teams have exited, mostly either to trade sales or flotations (though as many go into receivership as are floated). Flotations of management buyouts and buy-ins now account for 18 per cent of UK flotations.

Venture capitalists as well as the managent teams have made high returns from MBOs and there is intense competition between lenders. Many of the proposals for buyouts now come from potential lenders.