Selling to management a speedier, simpler option if the price is right

Mags Brennan, Debt Advisory Partner and Richard Duffy, Deal Advisory Director featured in The Irish Times Special Report on Mergers & Acquisitions.

MBO teams traditionally tapped funding from banks. Debt finance dominated their thinking because it allowed incoming management teams to have full ownership of a business.

“However, with the benefit in recent years of a highly active local and international private equity market here in Ireland, the typical approach now is to see private equity involvement,” says Richard Duffy.

“Their funding forms the backbone of a deal, along with an appropriate level of debt finance, and management teams with equity participation – albeit a lower stake – highly incentivised to accelerate the growth plans they might have for a business.”

As such, there has been a significant increase in the number of Irish business owners selling to management buyout teams, says Duffy.

“Despite a decrease in deal volumes last year compared to the post-Covid period, management-backed deals remain the cornerstone for mid-market companies and their owners looking for an exit,” he adds.

MBOs have traditionally worked well for established, niche operating businesses that are highly cash generative, with a strong customer base and established markets.

“From a seller’s perspective you get certainty and an exit, particularly where there is no apparent successor to take over the reins in a family business situation,” says Duffy. “Many owners don’t necessarily want to sell to a trade player either and are keen to see their business continue as is. An MBO is an attractive option in such circumstances.”

Going to the trade can unnerve staff, customers and suppliers, potentially impacting adversely on the value of a business; the opportunity to do an off-market deal avoids this, Duffy points out.

Given the higher interest rate environment, Duffy has seen a rise in the use of vendor loan notes and/or retained minority stakes in MBOs.

“In particular, the size of the vendor loan-note element and/or retained shareholding stake has increased for sellers. However, this is enabling management teams to complete a deal at sustainable debt levels while also locking in value for the seller going forward,” he points out.

“For those private-equity-backed deals, increasingly the approach adopted is for them to finance the deal themselves upfront in full and thereafter, once the deal is concluded, seek to replace a portion of their funding with debt when appropriate.

“As such, the deal is not contingent on securing debt finance, allowing the private-equity-backed management team to concentrate on negotiating terms with the seller and for themselves with the PE fund.”

There is still a role for debt funded MBOs, adds Mags Brennan, Debt Advisory Partner, pointing out that bank debt is still the cheapest form of funding, even at today’s rates.

While there are now only three domestic banks – AIB, Bank of Ireland and PTSB – supporting the corporate lending market, compared with 10 just 15 years ago, there around 65 alternate debt providers, as well as some international banks which continue to operate in the corporate market.