The light bulb moment in Twickenham in 2011 was the realisation that planning for a sale to your management team, a sale that you as a vendor would fund, could be a very powerful approach to succession planning. The vendor-funded management buyout is the point in time when the owner cedes control of the team. But how to reach that point is the challenge for the owner.
We have now developed a share incentive design process to support the owner to develop the management team and grow the business ahead of the V-F MBO.
The process is built around a Share Capital and valuation model based on adjusted net profits and on appropriate multiple.
The Model typically assumes a “re-basing” of share capital by the creation of preference (or “growth”) shares. This locks in the day 1 value to the current owners and shows value building for the key team members.
The Model also shows how the MBO will be structured and (at a high level) the cash flow for the payment period and the assumptions on which is it based. This empowers the owner as it enables them and us to focus on the key challenges to growth. These are usually around team building, team focus and performance.
But if the team don’t understand the process the model it doesn’t help. This is why we co-present this Share Capital Model to the team with the business owner. Invariably these are stimulating sessions which capture the imagination of all the team. To have them thinking like business owners.
Whilst the V-F MBO may be the preferred route for ownership transition it is not set in stone. Should a great offer from a trade buyer come along the owner would have the flexibility to accept that offer.
Introduction can and are often made to other advisers who can help the business owner implement the agreed plan and help them to achieve the desired growth.
Underneath the process sits a carefully devised legal framework. This typically comprises EMI Share Options (subject to satisfaction of the statutory requirements) and buy-back options for employee shares. If someone were to leave before the goals of the business owner are achieved. The structure of the MBO itself also includes protection for the owner with security such as charges over shares held by the management team. This can give the owner “step in” rights in case things to not go to plan.
Now having developed the process our focus has become routes to the market.
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