Debt only MBO secures optimal result for both vendors and management

In March Polestar announced the completion of the Management Buyout (MBO) for Dryad Group, which provided an excellent result for both the vendors and the existing management team, allowing them to buy into a business in which they had already invested much of their time and passion.

Polestar were appointed by the vendors, Nick and Lucy Beavon, to facilitate an exit and ran a comprehensive process to review potential options, ultimately deciding the best option was a debt and vendor backed MBO. Why?

The Business:

Sector Focus: supplying high-quality, student-focused arts and crafts products, including a comprehensive own-brand range to customers in the UK, Ireland and the Middle East

Customer Base: Servicing recession-proof education sector, with a loyal, long-term customer base, with a high level of repeat sales

Robust, scalable operations:  Comprehensive technology platform, resulting in process automation, speed and reliability in distribution

Financials: Solid financial track record of profitability (not necessarily high growth), including significant sales of valuable own brand range

Management Continuity: Experienced management team who were willing to fund the equity portion of the MBO, allowing them to secure a meaningful shareholding.

In addition to securing the vendors the majority of their accumulated value, the structure reduced risk for the new shareholders through retaining the previous MD as Chairman, with an ongoing stake.

Historically, MBO transactions involved private equity coming in alongside management and third party debt.  However over time there has been an evolution of the model, with vendors taking the place of the private equity fund, providing vendor loans alongside a retained equity stake.  This structure enables them to take the majority of their cash off the table whilst still getting the opportunity to benefit from future growth.  Additionally the vendor loans give a good source of income for the exiting shareholders. 

The key drivers for the development of Vendor backed MBOs are:

Continuing low interest rates mean that many business owners see leaving a stake within their business as a good investment option, given the low yields seen in other investment classes 

Given the deep understanding vendors have of their businesses, they will typically attach a lower risk profile to the investment compared with private equity

Management teams often wish to retain the experience of vendors in some capacity post transaction

Greater access to subordinated debt providers, who are willing to back debt and vendor backed MBOs, allowing businesses and their advisers to structure transactions without the use of private equity

Typically, non-high growth businesses do not attract a large private equity following, due to the high returns required by many funds

As a result of the debt-only structure, management obtained a higher equity stake than would have been the case in a PE backed deal. At the same time, the long-term profile of the subordinated loan places lower repayment requirements on the business than a smaller traditional bank loan, giving a strong financial foundation from which to grow.

The Dryad Group transaction demonstrates the potential benefits of a debt and vendor backed MBO to both the vendor and the management team.  New Managing Director, David Edwards commented: “The Polestar team’s input has been invaluable and has delivered an excellent result for all parties.”

A word of caution.  This structure is not suitable for every company and potential vendors should consult with their advisers to ensure that all options have been fully explored.  If you would like to know more, please let us know.

“The Polestar team’s input has been invaluable and has delivered an excellent result for all parties.”

By Sandy Ritchie on 29/04/2020