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A manager's guide to buy-outs

Buy-outs are challenging times for management teams both during and after the deal. Claire Oldfield of Kleinwort Capital finds out how managers and limited partners should work together to maximise value.

Leading a buy-out is a once-in-a-lifetime opportunity for most managers. It is one of the most demanding challenges they will ever face. And it begins some time before pen is put to paper on the completion documents.

One of the first things a management team has to do is persuade potential investors that it will deliver on the transaction. "You get one shot to convince them. If the deal falls down you don't get a second bite of the cherry," says Patrick Groarke, partner at advisory boutique Livingstone Guarantee. "Buy-outs can be an emotional rollercoaster. It is up to us to advise management on what is reasonable and unreasonable from the private equity firm and the vendor."

Richard Green, managing director of Kleinwort Capital, knows what he wants from a management team. "We are looking to support an enthusiastic and energetic management team that has a good business and the know-how to grow that business," he says. "We make sure we get comfortable with the management team and the chief executive and that they get comfortable with us. If we are going to deliver the returns our investors expect, we have to see underlying growth in the business. This doesn't have to be dramatic growth - it is about making reasonable profits over a sensible period."

Know your worth

It is, however, a two-way street. With competition amongst buyers for quality assets and teams intense, management teams are in a position to vet potential investors. "All venture capitalists can offer money," says Groarke. "But things like being able to get a good non-executive chairman on board make the difference."

Securistyle, a Cheltenham-based manufacturer of window hinges and locks, is a typical example. Management, led by chief executive Paul Cook and finance director Richard Boskett, had proved they could run the company in a leveraged environment after working through an institutional buy-out. When the time came to exit, the idea of a management - led deal appealed. Kleinwort Capital came up with the goods. "They paid the right price at the right time," says Boskett. "And it was a good opportunity for management second time around."

Groarke, who advised the management team, says: "They wanted to see if they could do a pure management buy out. And it was an opportunity for them to make a meaningful capital gain." With a buy-out there needs to be a clearly defined strategy to create value. In Securistyle's case, the plan was to build on the highly successful domestic business and move into new markets overseas. Kleinwort Capital introduced Richard Moon, who has vast knowledge and experience of the manufacturing sector, as a potential non-executive chairman. Moon believes the chemistry between chairman and chief executive is critical: "One of my roles is as confidante and mentor to the chief executive. I know how difficult it can be to have no-one to speak to. You can't go to your own directors because that is seen as a sign of weakness. I am not a threat."

Although Kleinwort Capital put Moon forward for the job, the Securistyle management team had the final say. "I would never take over the chair of a company if the relationship chemistry is not good between the two. It is quite a personal thing. To get maximum added value you don't want to be arguing and disagreeing."

Moon has helped the team develop a strategy to expand the business internationally. "I am addressing their mid-term strategy, which is to do with the export market," he says. "We are growing our export business in Europe and the Middle and Far East, as well as North America."

Targeted development

In the initial phase of a private equity investment, Kleinwort Capital works in partnership with the management team to develop an operational milestone plan. "It helps managers focus on what it is going to take to meet the business plan," says Green. "In the early days, they get a lot of support with milestone plans, dealing with banks and putting the right financial reporting in place. We are there to help if required but it's up to the management team how much they call on us."

But even when the buy-out becomes more mature, the support level remains high. For instance, all the portfolio companies can access Sourcerer, Kleinwort Capital's buying group. The services it offers range from discounted insurance to website design and marketing consultancy.

Working in a buy-out environment is one of the most challenging undertakings in the business world. But, as Richard Sanders, co-founder of Catalyst Corporate Finance, points out, "At the end of the day, management, venture capitalists, advisers - and even to a certain extent banks - are on the same side. We all want to develop a great business that makes money for everyone involved in it."

Claire Oldfield

Claire Oldfield is business news editor of the Daily Mail, writing this article for Kleinwort Capital

Kleinwort Capital focuses on mid-market private equity investments of between £ 10 million and £ 100 million in UK growth companies in the media, technology, healthcare and specialist manufacturing sectors. For more information visit www.kleinwortcapital.com