It is late 1996. Russell Hoyle is contemplating his next move after stepping down as managing director of Freetraders. He has been part of the successful MBO team, helped Freetraders grow into the UK’s largest independent wholesaler of drinks to the licensed trade and reaped the proceeds of a successful exit.
Money is not a pressing problem, the family might like seeing him some more and he will be able to spend more time flying his Beach Baron.
Within a few weeks he knows he is not ready to retire. He also knows that the MBO experience means he won’t, perhaps can’t, work for a large organisation again. The MBI search starts in earnest.
It is summer 1998, 18 months later. Bass has just sold its subsidiary, BLMS, to Leisure Link, a new company backed by GBP80 million ($130 million) from Duke Street Capital and Royal Bank of Scotland. Hoyle is walking into the office on his first day as chief executive. Leisure Link is the UK’s largest operator of fruit machines in the same pubs, bingo clubs, bowling centres and pool halls that Hoyle knew well from his Freetraders days.
By that time, Duke Street Capital had been working with him for just over a year and had seen at first hand the highs and lows of a typical MBI search – truly the job search from hell. Hoyle was asked if he would draw on his own experience to help others tempted down the same path.
Before you start: ask the hard questions
Before ruining your and your family’s life for a long period, it seems sensible to ask a few honest and self-searching questions.
Hoyle is adamant that no-one should start the process if what they really want is a job: “You have to have a single-minded ambition to complete an MBI in order to have any hope of success.” Even so, the process will take time. Allow at least 12 months but realise that 18 months to two years is not uncommon. Hoyle is blunt: “Can you afford to fail? If not, don’t start.”
Finally, realise that this is a full-time process: you really will have to give up the day job.
The approach: adopt the right mindset
Having decided to have a go, Hoyle advises: “Be very patient. Finding and completing an MBI is one of the most frustrating processes ever. Don’t let it get to you. Don’t quit.”
Further: “Be completely honest with yourself. Play to your strengths and recognise your weaknesses. If necessary, bring in other people to address those weaknesses.” Many people appreciate working with someone else, sharing the workload and, sometimes, the disappointments.
Finally, keep your sense of detachment and be prepared for failure. In Hoyle’s experience: “Deals usually come in twos and threes. If a deal craters, don’t knee-jerk into the next one because you’re desperate. The deal must be right or it will fail. Don’t gloss over due diligence. When pressure to do the deal gets extreme, it is easy to ignore the trouble that is staring you in the face.”
The holy grail: finding the opportunities
The journey will begin in hope. Most managers do the rounds of intermediaries and venture capitalists, often flattered by what they hear. Hoyle implores you not to be fooled:
“You will be told that you are the perfect candidate in all respects.
They will want to have your children. They actually mean, please bring us a deal’.”
Of course, venture capitalists meet many good people. Sometimes the timing is perfect, coinciding with a new deal or a management problem within the portfolio. But to maximise success, MBI managers must generate their own dealflow as well.
So, where to begin? Some start by asking: What type of company would I like to run?’ Perhaps they should ask: What type of company will my backers let me buy?’ Your past experience – the sector, size and country you know best – is where your financiers will be most comfortable. Hoyle agrees: “Stay in your sector. If you want to look outside it, recognise that this will increase the risk substantially and may make it harder to find backing.”
The great advantage of looking within your sector is that you will know the people and companies within it much better than any financier. How do you find the holy grail, the deal spotted before it comes to auction? Hoyle suggests two pieces of common sense: “Do your research, then network, network, network.” He began with suppliers to the licensed trade, spending considerable time researching the sector before deciding on potential targets. Although he knew most of the players in the industry, he had particular success with owner-managed businesses, often those with succession problems. Adopting the guise of the son he never had’ or the man who would stop the company being eaten-up by a faceless PLC’ worked more than once. Whatever the approach, a long brass neck is required.
Another obvious source is past experience. Many MBI managers begin with former employers or companies they tried to buy in a previous life. Hoyle looked hard at bidding for another drinks wholesaler before deciding he wanted to move on. BLMS was a company he had watched with interest since the late 1980s. His adviser, Russell Hart at SG Hambros, had approached Bass as far back as 1994 about whether the company was available. During the search, help is always welcome. Most of the big accounting firms, other intermediaries and
some venture capitalists will give research assistance to good managers. Best of all, it’s free until a deal is completed. Throughout his 18 months, Hoyle received help and support from both SG Hambros and PricewaterhouseCoopers.
The hard bit: closing a deal
Picking the right partner is probably an MBI manager’s single most important decision. Hoyle advises: “Treat your financiers as the partners they are. Don’t be secretive or combative. Most of all, don’t die in a ditch for the last half per cent of equity if you believe that your selected investor can really add value to the proposition.” A common tale of woe is successfully negotiating a larger slice of a deal that never happened.
In the case of BLMS, Duke Street Capital was an obvious partner. “He knew we wanted to back him since we’d worked together on a number of projects. The rest was up to him. He already had a considerable head-start on other potential purchasers because of the work he and Hart had done on the company and the sector,” says a spokesman. Bass’ advisers, Schroders, ran a very tight auction, only allowing Duke Street two weeks of exclusivity to close the deal. The price required was full based on historical numbers. The quality of Hoyle’s business plan was instrumental in getting to completion. Three of the main principles were:
1. Look for the angle that creates both the USP for the business plan and justifies the price that you will need to pay.
2. Make sure you can deliver the projections. Your job is on the line.
3. Know your exit.
If Duke Street had not believed Hoyle’s profit improvement plan’, his one-page guide on how to improve BLMS’ performance, it would not have bought the business.
Postscript: Leisure Link, a happy ending
Since buying BLMS, Leisure Link has successfully acquired Britain’s fourth-largest fruit machine operator, Stretton Leisure, as well as a number of smaller operators.
The business is trading ahead of the MBI plan. Most encouragingly, it is successfully working with its customers to provide a range of more added-value’ services that will enhance the company’s value considerably at exit.
So, was it all worth it? The attractions of running a large and successful business are obvious. And it is worth remembering that the rewards of an MBI can be commensurate with the effort. Hoyle is sitting on a substantial capital gain that should see that Beach Baron upgraded to something larger and faster sometime soon.
Russell Hoyle’s tips:
1. Make sure you don’t want a job
2. Allow yourself at least 12 months, ideally longer
3. Be prepared to work full-time
4. Be patient
5. Don’t quit
6. Be completely honest with yourself
7. Keep detached and be prepared for failure
8. Know when to walk away from a deal
9. Generate your own dealflow
10. Stick to the sector you know best
11. Do your research
13. Pick the right partner: deliverability is more important than equity stake
14. Look for the angle in a deal
15. Make sure you can deliver the numbers
16. Know your exit