Chapter 2

Starting the Process

Starting the Process

Covered in this Module

Positioning for a Buyout

Characteristics of Successful Buyout Companies

The Management Team

Understanding the Sale Process

Public to Private Buyouts

Secondary Buyouts

This Module reviews the initial stages of the Buyout process, and in particular the management team’s role in developing a credible Buyout proposition that establishes and maintains its place on the sale agenda. The first section, Positioning for a Buyout, looks at the issues faced by a management team before and during the early stages of developing the proposition, and identifies the general principles to be followed in addressing them. The points addressed in this section are put into a legal context in Appendix 1, which provides a summary of directors’ duties and obligations. A case study, the Buyout of Risdon Pharma, illustrates many of these principles.

The second section, Characteristics of Successful Buyout Companies, reviews the criteria which guide private equity investors in deciding whether or not to pursue a Buyout proposal. It is intended both to help managers form a judgement, at an early stage, about whether their company represents a viable Buyout candidate and to provide some pointers as to steps that might be taken to enhance its prospects.

The Understanding the Sale Process section outlines the three main approaches to selling a company, and looks at management tactics during the sales process in more detail, and the Public to Private Buyouts section highlights the specific issues relating to Buyouts of quoted companies. Finally, issues specific to secondary Buyouts are addressed in the section Secondary Buyouts.

Although most senior managers will have some experience in buying and selling subsidiary companies, the Buyout challenge is significantly greater. It entails:

  • dealing with the unfamiliar language, philosophy and approach of investment banks, corporate finance advisers and investors;
  • addressing issues of loyalty and obligations in an environment where all the rules have changed;
  • contemplating the prospect of a transition from employee to significant shareholder; and
  • ensuring that the business continues to operate successfully under the pressures of a sale process

Many managers who have been through a Buyout describe the process as the most challenging of their careers.