Guide to Management Buy-Ins in the UK

MBI Funding
Management buy-ins (MBIs) in the UK are typically funded through a combination of debt and equity financing. Several funding sources are commonly used to finance MBIs, which include:

Private equity (PE) firms often play a significant role in financing MBIs, providing the required capital in exchange for a stake in the company. PE firms typically seek to work with experienced management teams to drive growth and operational improvements in the target company, eventually aiming to exit their investment through a sale, IPO, or another form of exit.

Traditional bank loans can be used to finance a portion of the MBI transaction. Banks may provide term loans, revolving credit facilities, or asset-based lending, depending on the creditworthiness of the company and the management team, as well as the underlying assets and cash flows of the business.

In some cases, the sellers of the company may provide financing to facilitate the MBI. This can take the form of deferred payments, earn-outs, or subordinated debt, allowing the management team to acquire the company with a lower upfront cash payment. Vendor financing is typically used when the sellers have confidence in the incoming management team and believe in the future growth prospects of the business.

Mezzanine financing is a hybrid form of debt and equity financing used to bridge the gap between senior bank debt and equity capital. Mezzanine lenders provide subordinated debt, which carries a higher interest rate than senior debt, and may also receive warrants or options to convert their debt into equity, providing them with the potential upside if the company performs well.

The incoming management team may also invest their own personal funds as equity in the MBI transaction. This demonstrates commitment and confidence in the business's prospects and may be a requirement for external investors, such as private equity firms or banks.

In some cases, government-backed loan schemes may be available to support MBI transactions. For example, the British Business Bank offers the Enterprise Finance Guarantee (EFG) program, which provides guarantees on loans to small and medium-sized businesses that may have difficulty accessing traditional bank financing.

Examples of Management Buy-Ins in the United Kingdom:

ECI Partners and Management Buy-In (2012) - ECI Partners, a UK-based private equity firm, backed a management buy-in at Clarke Energy, a global provider of gas engine power plants. The MBI team, led by CEO Hugh Blayney, aimed to support the company's growth plans and expand its product range.

Patisserie Valerie MBI (2006) - Luke Johnson, a British entrepreneur and former chairman of Channel 4, led a management buy-in of Patisserie Valerie, a chain of patisseries and cafés. The MBI team focused on expanding the business, increasing the number of outlets, and improving the quality of the products. The company was later listed on the London Stock Exchange in 2014, though this success was short-lived (see below).

GTech Fitness MBI (2016) - GTech Fitness, a UK-based fitness equipment supplier, underwent a management buy-in led by CEO Andy Loughray, who aimed to expand the company's market presence and enhance customer service. Following the MBI, the company pursued growth through both organic and acquisitive strategies.

Blackstar Amplification MBI (2017) - A management buy-in occurred at Blackstar Amplification, a British manufacturer of guitar amplifiers and effects pedals. The MBI team, led by CEO Laurence Bellman, focused on expanding the company's product range, investing in marketing and sales, and improving operational efficiency.

Tobar Group MBI (2015) - Tobar Group, a UK-based toys and gifts wholesaler, underwent an MBI led by CEO David Mordecai and Chairman Garry Watts. The new management team aimed to expand the company's product range and grow the business through acquisitions. The MBI was backed by private equity firm Merino Private Equity.

The Alumasc Group MBI (2007) - The Alumasc Group, a UK-based building and engineering products company, experienced an MBI led by CEO Paul Hooper. This MBI resulted in a shift in strategic direction, focusing on niche building products and engineering markets, and enhancing shareholder value through operational improvements and targeted acquisitions.

BSW Timber MBI (2013) - BSW Timber, the largest sawmilling business in the UK, underwent a management buy-in led by CEO Tony Hackney. The MBI aimed to strengthen the company's market position and drive growth by investing in new production facilities, product innovation, and sustainable forestry practices.

Shield Environmental Services MBI (2017) - Shield Environmental Services, a UK-based asbestos removal and environmental services company, experienced a management buy-in led by CEO Luke Yeoman. The incoming team focused on expanding the company's service offerings, improving operational efficiency, and pursuing strategic acquisitions to accelerate growth.

Cinesite MBI (2012) - Cinesite, a UK-based visual effects and animation company, underwent a management buy-in led by CEO Antony Hunt. The MBI aimed to expand the company's services, invest in technology, and develop new partnerships within the film and television industry. The MBI was supported by a private investment from the UK and Canadian firms.

By leveraging the experience and expertise of an incoming management teams with fresh perspectives, MBIs can drive growth, enhance performance, and ultimately create value for shareholders.

The success of MBIs often depends on the compatibility and expertise of the incoming management team. In instances where the new team brings valuable industry knowledge, experience, and networks, the MBI can lead to a significant improvement in the company's performance.

MBIs can sometimes face resistance from existing employees and other stakeholders due to the perceived uncertainty and change in leadership. This may affect the success of the MBI if not managed carefully, as it could lead to decreased morale and potential loss of key personnel.

Compared to other types of acquisitions, such as management buyouts (MBOs), MBIs have the advantage of bringing fresh perspectives and ideas to the target company. However, the new management team might also lack the in-depth understanding of the company's culture and history that an MBO team would possess.

The financial backing and support from private equity firms, which often facilitate MBIs, can play a crucial role in their success. This external investment can provide the necessary resources for strategic growth initiatives and operational improvements.

Regarding the specific examples mentioned previously, it is essential to note that the success of each MBI varies based on the individual circumstances, industry dynamics, and broader economic factors. Some of the MBIs have resulted in notable growth and expansion, such as Cinesite, while others may have experienced challenges or mixed results i.e. Patisserie Valerie - the company discovered significant accounting irregularities, leading to the suspension of its shares and the arrest of its finance director. In January 2019, Patisserie Valerie entered administration after failing to secure a rescue deal.

The collapse of Patisserie Valerie highlights the potential risks and complexities involved in MBI transactions and the importance of robust financial controls and corporate governance. While the MBI initially appeared successful, leading to the company's expansion and IPO, the subsequent financial scandal and collapse underscore the need for thorough due diligence and ongoing oversight in such transactions.