A management buyout (MBO) involves the purchase of a business by its management team, often with a combination of private and external finance. For shareholders, a management buyout can present a sound alternative to a trade sale, while buying managers have the opportunity to be business owners and reap greater rewards for their work.
According to Top 10 Accountancy firm Moore Stephens, in recent years, the number of MBO deals has seen a steady rise. Last year, the number of deals rose 20%, from 76 deals in 2016 to 91 in 2017. In the same period, the total value of MBO deals grew from £2.6 billion to £2.7 billion – a 4% increase.
Recent Management Buyout Stats
Technology companies were the most highly represented amongst last year’s management buyouts, constituting 20%, or 18 of the 91 deals. Second place went to the 10 industrial deals (11%), followed by 8 in manufacturing (9%).
This year’s high-profile MBOs include the buyout of Pizza Hut, with a reported £100 million deal in which CEO Jens Hofma will take over the business from private equity backer Rutland Partners. Holiday Extras also made news with its £30 million MBO, putting 55% of the company’s £100 million equity into an employee benefit trust.
So what is the reason for the recent flurry of MBO activity?
Political uncertainty contributing to high Management Buyout levels
Political instability generally tends to have a negative effect on deal-making, but it appears to have had the opposite effect on management buyouts. The sudden General Election in 2017 prompted deal activity, as business owners sought to offset risk in the event of a government change.
Risks include the withdrawal of Entrepreneur’s Relief, a scheme that allows directors of companies who own 5% or more of a company to pay a lesser tax rate of 10% on capital gains and assets, as opposed to 28%. The Labour party has also already pledged to increase capital gains tax should they return to power, and even in the current government, NHS funding shortages and potentially large Brexit bills could also lead to higher capital gains tax.
Ample available funding
Another contributor to the rise of management buyouts is the copious funding available for buyouts, including equity and debt funds, as well as both traditional and challenger banks. Greater competition in the funding market has meant a boost in transactions.
Private equity firms are sitting on an abundance of dry powder, which amounted to a record-breaking $1.7 trillion at the end of 2017, according to Bain & Co. With pressure to put this profusion of capital to work, there is a high appetite for deal-making, with favourable valuations to boot.
Management buyout activity slowed down post-financial crisis, with business owners delaying their exits, waiting for the right moment and favourable valuations; the last couple of years appear to have provided these. Despite on-going political uncertainty, the UK has been showing healthy growth figures. Though Brexit negotiations appear to be stalling, having a definite Brexit date set last year may have also contributed to favourable valuations, with the deadline helping assuage some concerns.
2017 was a bumper year for management buyouts, and though 2018 has seen slightly less activity, deals are set to continue steadily for the rest of the year. With Brexit drawing ever closer and the future of the government still uncertain, the appetite for MBOs remains healthy, with funding available and conditions continuing to be favourable.
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