How much could an exit process be disrupted by a concurrent MBO?

Could a potential conflict in preferred valuation/outcomes/mgmt team cause issues? Better to run them separately / one first? Or if we're going for intended exit, should we focus on that so it's all aligned? Without extra funds, mgmt team would need PE support which imagining would be a lengthy process to secure, especially if value circa $30M. And better to have mgmt team chasing their existing and potentially lucrative equity reward, renegotiating any ongoing opportunities with a new acquisitor for post exit, rather than holding a similar share, rolling under a PE investor in an MBO with a potentially more challenging ride ahead?


These are questions best addressed by the corporate advisory service handling the sale of the business.

It is not necessarily a lengthy process to secure a PE deal. Some PE firms are well placed to take a quick decision provided, and this is an important caveat, provided you are well prepared and have all your ducks in a row.

And you have the advantage of a full management team and one (presumably) already motivated by a share incentive scheme.

It's imperative you have a good corporate finance adviser on board. It may well be that your best option is for the management team to raise finance independently and without relying on PE.

I must confess that the latter part of your post has lost me completely and I've no idea what you're trying to get clarified!

Answered 7 years ago

There are several possible ways of exit for a company. Going public with initial share offering or which we call IPO is first option, Trade sale, Buyouts and Leveraged Re-Capitalization are other possible ways.

Whichever exit strategy founders/investors adopt the first and foremost thing is company valuation. There are several ways in which a company could be valued.

You can use Discounted Cash flow Method to discount your Free Cash Flow and then to get Terminal Value using discount rate and growth rate and then discounting the terminal value over the period you discounted your FCF and then to get Implied Enterprise Value. Other than this you can use Trade Comparables using EV/EBITDA or EV/Revenue Multiples. You can use average of your profits to date for calculating Goodwill but Goodwill is not advisable for Startups which are yet in the scaling up phase.

Normally using Trade Comparables is the most suitable valuation method to avoid any type of conflicts. Using the valuation of Company you can then calculate its share price for IPO or you can determine Initial Offering Price if you are going for Buyout.

Usually Trade Sale or Leveraged Re-Capitalization are most suitable form of exit. In a trade sale transaction, owners can also exercise more control over the whole process, and in certain cases might even end up obtaining a higher value for the company compared to other exit methods. While under Leveraged Re-Capitalization you can extract cash without selling company. Under this method you can substitute some of the company’s equity with additional debt. The most important advantages generally associated with leveraged re-capitalizations are that owners can remain in control whilst still receiving payment and the possible tax benefits compared to other types of exits.

Another option is Secondary Buyout which I will prefer over Leveraged MBO. under secondary buyout you can sell your company directly to Private Equity Investor rather than waiting for the management to secure funding through private equity you can offer it directly to an investor.

Owners prefer MBOs because they think that employees of a company could better run it using their existing client base and relations as well as their understanding of that company but if an MBO is carried out through Private Equity Funding it will definitely raise the debts of company and in most cases will transfer partial control of company to the private equity investor in the form of equity transfer.

Other than this MBO may result in low value transfer of company which is not advisable if other options are available. As the management has access to insider information so they may use unfair means to get a lower Enterprise value for lowering the burden of debt to finance the buyout. Another reason is limited access of management to capital which could affect the price and the terms of exit process.

If a company/enterprise is valued well using the proper valuation method benchmarked against industry/market using fair and justified free cash flow then the chances of valuation conflict will be lower than otherwise even if concurrent MBO is going on. It will be much more difficult for the management of company to use unfair mean or to exploit insider information to influence/halt the ongoing exit process.

Answered 7 years ago

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