Not being a financial wizard, I have been doing some research on what is involved in a management buy-out, so that I understand the implications of yesterday’s 4Projects announcement better.
Wikipedia’s MBO entry yields some interesting background on private equity-backed MBOs:
“The private equity investors will invest money in return for a proportion of the shares in the company, though they may also grant a loan to the management. The exact financial structuring will depend on the backer’s desire to balance the risk with its return, with debt being less risky but less profitable than capital investment.
Although the management may not have resources to buy the company, private equity houses will require that the managers each make as large an investment as they can afford in order to ensure that the management are locked in by an overwhelming vested interest in the success of the company. It is common for the management re-mortgage their houses in order to acquire a small percentage of the company.
Private equity backers are likely to have somewhat different goals to the management. They generally aim to maximise their return and make an exit after 3-5 years while minimising risk to themselves, whereas the management rarely look beyond their careers at the company and will take a long-term view.
While certain aims do coincide – in particular the primary aim of profitability – certain tensions can arise. …. As a condition of their investment, the backers will also impose numerous terms on the management concerning the way that the company is run. The purpose is to ensure that the management run the company in a way that will maximise the returns during the term of the backers’ investment, whereas the management might have hoped to build the company for long-term gains. Though the two aims are not always incompatible, the management may feel restricted.
From the perspective of a UK competitor of 4Projects (I am, of course, employed by BIW Technologies), it will be interesting to see if this change of ownership structure leads to any major changes at 4Projects. Optimistically, I hope it might result in some more transparency in its financial reporting so that can at least compare its results with those of the other UK market players (including BIW, Business Collaborator and Asite), which report their figures more fully to Companies House (see previous post) – to date, we have relied on brief statements in the press to gauge 4Projects’ performance.