MBO Telecommunciations

Background

The owner of a telecommunications business which he had built up over 18 years wished to sell up and retire in 2001.

A trade buyer (perhaps on a fishing trip) had provisionally offered “top dollar” for the company only to walk away after a good look at the management accounts.

The business had a turnover of just over £1m, was profitable but had an indifferent balance sheet and the storm clouds of recession in this sector were gathering.

Deferring retirement plans the owner soldiered on, only to hit very choppy water and incur substantial losses. His final option was then to either wind up the company or sell to management who had been with him some time and knew the business well.

Negotiation

The business was first offered to management at too high a price, with a flawed earnout formula involving achievement of Sales not Gross Margin, and included the Owner staying on as Chairman post deal (conflict of interests).

The team (advised by Avocet) decided to turn down the offer to buy both because of these terms and the prospect of a further deterioration in market conditions.

Eighteen months later after downsizing and continued heavy losses the team was offered and accepted the business at a fraction of the former asking price, with the owner not staying on as Chairman and an earnout formula based on Gross Margin not Sales.

 

The Process

Avocet stayed in touch throughout this drawn out negotiation period and assisted in:

  • Staff Strategy; how to run the business whilst negotiating and post deal key staff incentive scheme
  • Business Plan; assessing risk with varying sales and resultant manning/overhead scenarios, product portfolio strategy, identification of working capital requirements
  • Exit Route Strategy; who would the team sell to when they wanted to exit in say 5 years time, so that they could mould the business over time to make it more attractive to that category of prospective purchaser
  • Tax Advice; arranged for the Team to see an appropriate professional specialist
  • Legal Advice; arranged a beauty parade of appropriate solicitors with the selected firm preparing Purchase Agreement, Shareholder Agreement and Employment Contracts
  • Protection; Team referred to Key Man Insurance specialist to financially protect individuals and their shareholdings against the sudden loss of a key team member
  • Negotiation; pragmatic assistance in clause by clause negotiation with the Owner and the Solicitor to ensure the legal documents remained faithful to the inherent simplicity of the deal and did not create a life of their own!

Post Deal Fortunes

Following 3 years of losses modest pre tax profits were achieved in every month bar one in the 12 months following the deal. With the market now just starting to improve the Team seem ideally placed.

Morals

  • The Owner left it too late in the industry cycle to obtain a good price for what had been a very profitable business
  • The Owner did not have a viable Plan B when rejected by the Trade Buyer

The refusal of the Management Team to get emotionally sucked in to the original unacceptable offer and their subsequent patience in waiting for more optimum conditions was rewarded.