CFOs play a critical role in management buy-outs

Agile Capital’s Liz Kolobe says a successful management buy-out needs a CFO who can adapt to new business.

The challenges that have appeared in the business sphere recently have meant that innovation and change have been two leading trends in all sectors. Global corporations are slowly sloughing off businesses that do not form part of core operations: as the market re-assesses and adapts itself to the repercussions of the pandemic, divestiture is emerging as a positive trend both for the seller and buyer.

“We have seen the number of management teams seeking to acquire autonomy grow, and take advantage of the opportunities presented,” says Liz Kolobe, principal: Agile Capital. “We are always looking for management teams that have the appetite to be business owners. Those that really understand the business and that have a shared compelling vision of business success.”

An entrepreneurial CEO who is supported by a strong CFO is something that investors see as an attractive combination for a sustainable business. While finance remains a key component, having the right person who truly understands the business and its capabilities, products and services and the business outlook, can be a deal maker – or deal breaker. An MBO/MBI requires that the management team demonstrate the financial viability of the business.

The CFO will be required to put the right financial strategy and controls in place from the outset to support the vision. Implementing this appropriately will not only chart a way to success, but inspire and enthuse employees, clients and shareholders in the process.

“We recommend to potential partners that the right CFO, one who can adapt to the new business, is in place. Alternatively, we would encourage businesses to find the person to effectively fulfil this particular role within the ‘new’ business, if required,” says Liz. The CFO quantifies whether the business remains on track. They know if earnings, growth, or cash flow are accurate and ensure that the right KPIs are in place and are monitored to support effective decision-making.

That being said, the business needs to be able to expand into a stand-alone entity. The value of the wider management team is also measured in them owning the key relationships in the business. This is true of vendors, customers and both internal and external stakeholders, with an emphasis on customers that drive the viability and security of the business’s revenue and reason for its existence.

The relationships with financial controls and processes when dealing with suppliers, vendors and clients, while always important, become particularly exacting when executing an MBO. The CFO can support the CEO in educating all stakeholders regarding the new development – effectively ensuring that from the beginning, everyone clearly understands the vision of the company. This creates a positive outcome – something well worth the effort required.

Prior to pursuing a management buy-out, it is essential that the liquidity options available to the company are considered. Entering the buy-out process without fully studying all of the options can be shortsighted, notes Liz. Private Equity partners are able to assist with assessing the different funding options and even refining the capital structure of the business should it be required.

As PE partners we offer growth capital required within the business or for new acquisitions depending on the requirements and life stage of the business. This can often be the next step in positioning your company for sustained success and growth.

The management team’s confidence in their strategy should be compelling enough that they are prepared to significantly invest in their business to ensure their ongoing dedication and shareholder alignment. The financial team would have to ensure that the resources to actively grow – and run the company – are put in place. Additionally any information regarding quality of earnings and working capital considerations required to achieve business objectives would need to be carefully monitored.

“As private equity investors, although not operational, we are not passive shareholders. We’re able to offer both strategic and financial support to the team – particularly around corporate governance and the future funding of the business for acquisitions and the like. Since we are mainly chartered accountants ourselves, we have a natural kinship with the CFOs, but we leave the management team to run the business,” says Liz.

Finding the right partner in the market is key for both buyer and seller. Agile has a long-term investment view and we always look to drive business success – both in the long and short term. “We view the management of companies we invest in as equals,” concludes Liz.