Millionaire Goal For MBI Executives

A new report reveals the highs and lows of the MBI process

The management buy-in process is long and painful but for those who pursue it, the personal challenge and financial gain are well worth it. The Springboard MBI Report 2001 (sponsored by Directorbank, DLA, Grant Thornton and West Private Equity), based on a MORI survey of successful MBI candidates, reveals, on average, each manager expects to make more than 1634 million in capital gain on the sales of their shares on exit from the company. However, only 19% said they were primarily motivated by the financial gain whereas the largest group (43%) were initially motivated by the personal challenge.

There were three areas identified as showing higher than average returns for the managers. Firstly were those with the patience to pursue the right deal, as a search longer than 2 years led to an anticipated financial gain of 1637.2million. It is also clear that remaining in one sector reaps greater returns as this group reported an anticipated 1635million return. More surprisingly was the band of managers who completed MBI deals between 1633 and 16310million who expected a return of 1637.5million. This could be explained by the fact that managers of smaller deals tend to retain higher levels of equity in the company.

Despite 60% of respondents saying it took longer than expected and 70% of those who searched for a deal full-time supporting themselves with their own savings, 80% said they believe it will be worthwhile financially. This may owe something to the fact that their personal financial exposure was very low - (RR) only 10% said they were very exposed financially and could lose everything, and a further 58% felt it would make only a small or no difference at all if it went wrong.

The survey bears out the difficult nature of the MBI process with more than six out of ten successful managers dedicating themselves full time to a search and seriously considering an average of three deals. A successful deal took, on average, 14 months to complete although the 17 % who spent more than two years to find the perfect match expected to make substantially more.

Successful deals are most likely to come personal contacts with 47% citing this as their primary source, followed by corporate finance advisers (37%). Venture capitalists were the source for only 11% of deals. However most managers (59%) found it easy to secure venture capital backing. Overall, levels of satisfaction with advisers were high. Lawyers were voted top, with 84% satisfied with their advice and support, and, although bankers were the least rated, a high number (73%) still expressed satisfaction.

"There is strong evidence from our survey that pro-active people with a highly focused strategy in one sector that they know get results." said Stephen Ross, Chief Executive of Springboard Plc who provides funds and support to MBI candidates during the search phase. "It is also clear that even proven CEO's need the right support along the way and must be prepared for a long process." The difficulty in securing a deal is supported by Jonathan Hick, CEO of Directorbank the leading database of senior executives available for venture backed businesses who says "Of the 5000 or more excellent CV's we see in a year, we may find opportunities for 10 to 20% but no more than 1% will actually conclude a deal."

Technical details

• 70 telephone interviews were conducted with senior executives who had conducted a successful MBI in the last 5 years
• Fieldwork was completed between 26 June and 17 August

Case Studies

Ray Peck, Banner Business Supplies, 16310million MBI, December 2000; t: 07721-446 133

Ray Peck had been working in the office and computer supplies business for some 18 years. His roles had included working as a finance and commercial director and then as the Managing Director of two companies in the sector, Niceday and Corporate Express (UK).

At 43 years old, Ray had for many years harboured a desire to be his own boss. He took the decision to seek a management buy-in opportunity having tired of creating wealth for others only to see his highly successful profit-recovery and growth programmes undermined by corporate takeovers.

In March 2000 Ray was introduced to Grant Thornton Corporate Finance by his lawyers. Between them they developed a list of several potential businesses that they believed could be approached.

Ray's search led him to Banner Business Supplies, a national distributor of office supplies with a forecast turnover, at that time, of 16380m.Following negotiations a successful 16310m MBI was completed in December of last year, funded by Gresham Trust.

Ray commented, "Running my own business has been an ambition for some time. We identified 9 businesses as potential targets and selected Banner as, by far, the company with the greatest upside potential, and we approached 3 private equity providers before selecting Gresham as people I felt comfortable with. The whole process was exciting, but very protracted."

David Ascott, of Grant Thornton Corporate Finance, who led the transaction added, "Identifying quality MBI candidates is a tough business, but Ray had impeccable credentials. We believe he has bought into a strong business that, with the financial backing of Gresham Trust, will grow strongly."

David Ascott, Grant Thornton: 0870-324 2315

Laurence James, MBI of County Bookshops Ltd, April 2000, 1635-10 million; t: 01285-860 375

A former retail sales director for W H Smith and MD of Ladybird Books, James bought County Bookshops with backing from Lloyds. Having decided that he wanted more control and independence James embarked on an 18 months search, which involved 12 approaches to businesses in the retail sector. The final deal took 6 weeks to complete due to the vendors timetable and so bank debt was the only financial solution available. Despite a strong management team the bank withdrew their funding 12 months down the line and business folded.

"The process was lonely and difficult and having determination and a support infrastructure to keep me going was very important. Completing an MBI requires a very different set of skills to being on the board of a FTSE 250 company. It is imperative that you select other team members who understand the workings of external funders", says Laurence James.

Sponsors

Springboard Plc

Springboard focuses on attracting management teams that have demonstrable success in creating shareholder value. These teams may be seeking to undertake management buy-ins or start-ups and require duding during the search phase of an MBI or initial stages of a new venture. Springboard will provide these funds and then work with management and their advisers to raise substantial second round funding from the mainstream venture capital market. Springboard has backed over 20 management teams who have raised over 163160m in funding following initial support. The company was established in 1998, by an experienced venture capitalist and itself raised 1635 million by floating on AIM at start-up and a further 16324 million in April 2000. The business is backed by some of the UK's leading venture capital firms and institutional investors.

Directorbank

Directorbank is a national register of senior directors available for immediate appointments in venture-backed companies. Over 500 executives, in 30 of the UK's leading venture capital firms, have access to the confidential service, conducting upwards of 100 searches a week for executive and non-executive directors to join buy-in deals. Directorbank's database includes some of the most successful business people in Britain.

DLA

DLA is an innovative, international law firm and it has achieved spectacular growth over the last few years. It is now top ten in the UK and has a significant presence around the world. With a fee income last year of 163176 million and over 2,200 employees, including 285 partners globally, more than 1200 other fee earners and over 1000 support staff, the firm delivers professional advice and business solutions to clients around the globe.

Grant Thornton

Grant Thornton is one of the world's leading organisations of accounting and consulting firms providing assurance services, tax and specialist financial advice to entrepreneurs and fast-growing businesses. With 235 partners and a further 2,600 staff in over 40 offices across the UK, we are ideally placed to provide tailored advice. Grant Thornton Corporate Finance is a major provider of Lead Advisory services to mid-market transactions in the 1635 million to 163100 million range, including MBO's, IBO's, acquisitions, disposals and MBI's. Through access to our widespread network and dedicated research teams, our MBI programme enables us to work proactively with selected individuals in the search process. Having established a target, we work closely with our candidates, applying our extensive experience of finance raising, deal structuring and negotiation to provide commercial practical advice throughout the transaction.

West Private Equity

West Private Equity, the European private equity arm of Investment Bank, WestLB, manages a Euro 400 million Fund, which provides capital for buy-outs, buy-ins and growth investments with a focus on established mid-sized businesses across Europe. It targets a broad range of industries, but uses the expertise of its senior executives in four key industry sectors - Business Support Services; IT, Telecommunications and Media; Industrial "Special Situations"; and Consumer and Leisure Products and Services. West Private Equity is based in London and its advisory companies have offices in Dьsseldorf and Milan.