The established route to a management buy-in (MBI) under-serves the senior executives that make the process possible. With an already successful UK offering now ready to roll out across Europe, recruitment firm Ellis Fairbank plc is changing that.
Recruitment consultants have historically found the right businesses for people to work for. In an interesting twist, the new division of international recruitment consultancy, Ellis Fairbank is looking for the right businesses for people to buy. Rob Chapman, head of the Corporate Services division offers the following advice:
There have traditionally been only limited options available for skilled company managers with ideas of taking ownership of their own company via a management buy-in.
The established route of approaching a venture capitalist (VC) and becoming part of an MBI team has had its benefits for many individuals. However, this route has always been focused primarily on the VCs' own investment, with the concerns of the incoming management merely an ancillary concern.
Ending reliance on VCs
Using information and expertise historically under-utilised by recruitment firms, Ellis Fairbank's MBI Programme assists senior executives looking for a new challenge, allowing them to front MBIs themselves, rather than relying on a venture capitalist to stump up the cash and allowing them to call the shots. Ellis Fairbank method of bringing recruitment sector expertise to the transactional marketplace has three primary strands: acquisition targeting, corporate disposals and management buy-ins.
The vision revolves principally around the current lack of quality, expert support and advice for the high level executives that are crucial to a successful MBI. By employing the information and skill sets innate to an established recruitment business, the Ellis Fairbank hopes to match highly skilled individuals with high-potential businesses.
By targeting attractive businesses in pre-sale stages (ie, where the existing owners have not yet considered or adequately planned for an exit) the team finds targets for its MBI candidates. By providing an alternative route to a transaction the process allows the candidate to lead an MBI on his or her terms, retaining autonomy and, crucially, a large share of the equity.
Information, knowledge, contacts
The origins of the concept lies in discussions on how to better utilise the vast corpus of information that a recruitment company invariably collects while pursuing its primary function of finding jobs for candidates.
"When I joined the business in 2004 I looked at the assets and USPs (unique selling points) to try and work out how could grow our offering," comments Harry Cross, Ellis Fairbank commercial director.
"Recruitment businesses tend not to have tangible assets like buildings, factories or machines; instead they tend to have information, knowledge and contacts. In our case we have over 100 consultants out there talking to key decision-makers every day.
"We realised that all we were doing with that resource at the time was using it for recruitment purposes. We thought that there must be a way to make the most of the information we had at our fingertips, to stop it effectively becoming a wasted resource."
The cornerstone of the MBI programme is the relationship fostered between Ellis Fairbank and potential MBI candidates, which then feeds into a relationship with the target. Candidates, while hugely valuable to businesses and the economy in general, were ill-served by the existing routes out of employment and into company ownership that were open to them.
When Ellis Fairbank first started to test out ideas we came across a lot of people who were fed up with making money for other people. For an entrepreneurial person in business, autonomy is important. In our early discussions with individuals, we often find that they would prefer an alternative to just being employed by someone else. They have the skills and experience necessary to run their own company; they just require a means of achieving that goal.
This is not just the case for individuals in huge corporates. For example, we have seen the same dissatisfaction in executives running the UK arms of foreign companies or people already working in a private equity-backed business.
Until now there has not been much of a provision for skilled senior executives who want to move into a more autonomous ownership role. There has just not been anyone in the marketplace helping those people, many of whom have never considered taking ownership of a company as an option.
The traditional route taken by experienced professionals with the requisite skills to front an MBI has been to approach venture capital and private equity houses directly. However, this has not always been to the benefit of either the candidate or the target.
People have naturally gravitated towards the venture capitalists for want of any better route. If that works for some people, it is usually as a by-product of the financier finding the deal it requires and looking for a management team to deliver it.
Obviously the VC will not proactively seek an opportunity just for the candidate. Their approach usually begins with a pot of money to be allocated, bringing in the appropriate professionals to manage the acquired business later on.
And because the management are only introduced to the deal at a relatively late stage, the venture capitalist can dictate the terms and the equity share they will receive. At that stage, as an incoming manager, you have to ask yourself if you are ever going to be more than a glorified employee on the financier's payroll.
The Ellis Fairbank model effectively reverses this process, beginning with the individuals who will manage the business, sourcing the target and bringing in funding at a later stage. This method has significant advantages over the more established equity acquisition route from the perspective of both the management team and the seller.
The traditional methods have always struck me as an odd way of working. You are sourcing the management team late - even though that is where all the real value lies.
If you get the wrong management team the potential value, which forms the basis of the transaction, will not be delivered. This of course is why many transactions fail to deliver the results projected before the deal.
In our system, a relationship begins to gel between the acquiring management and the vendor from day one. They can then set fairly aggressive terms for the funder, because the transaction relies upon the relationship between buyer and seller rather than the funder's involvement. The central idea in all of this is for the vendor and acquirer to retain control over the transaction and the new owner to retain control over the business, rather than conceding control to a third-party investor at any stage.
In fact, the majority of our deals have been debt-funded for this reason. It is simply not necessary to give away large chunks of equity just to get a deal done.
As a means of exit the process can also be very ethical when approached correctly, which gives peace of mind to vendors. For the regional businesses that are perfect targets for the MBI programme, local reputation and succession are crucial. Because the new owner is an individual, there is no threat that the business will be absorbed into a larger group, and therefore a reduced risk of job losses and culture change after the deal.
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