This relatively small but profitable engineerig company was a model of stability, but when the owner suffered some ill-health, the prospect of a sale became all too real. Can the management team take on the responsibility of an MBO, or is the risk just too great?
JOHN MURPHY’S DECISION to sell the company he founded more than 30 years ago came as a shock to his management team. He had always joked that they would have to carry him out of the factory in a box and as he was first in every morning and the last to leave every night, nobody doubted him. A heart attack three years ago was the first sign that Murphy, who had always seemed invincible to his staff, might have feet of clay after all.
His illness gave everyone a fright but Murphy had trained his team well and his managers quickly picked up the slack. The business continued to run smoothly with day-to-day operations carrying on as normal.
Murphy initially set up his engineering business to service the needs of the local agricultural community. But he was progressive and interested in growth. His company subsequently became a component supplier to what was, in the 1980s, the thriving automotive components sector in Ireland. The company also began making parts for exterior door fittings and within the past 10 years became involved in specialist sub-component production for the medical devices sector.
The company employs 27 people and is expected to have sales of close to €10 million this year. Margins have become tighter in the past three years but the company is still comfortably profitable and has cash reserves built up during the building boom. Most of the staff have long service with the company. The production manager has worked with Murphy from the off while the head of technical design is there more than 20 years, as are the quality control and finance managers.
Murphy announced his intention to sell at what was supposed to be a routine Monday morning management meeting. He gave little explanation for his decision beyond describing it as “an offer I couldn’t refuse”. He assured them that nothing would change as the buyer, who already had a plant in Ireland, wanted to continue running the business as was. The process of due diligence would start before Christmas and Murphy said he was hopeful that the deal would be concluded no later than June next year.
While his managers were absorbing this bombshell, Murphy dropped another. He would continue to run the business until the sale was finalised but the executive from the parent company appointed to succeed him would start spending time at the company to learn the ropes first-hand. Murphy asked his managers for their full co-operation on this.
The first to react to news of the sale was the finance manager, Paul Clarke, who contacted the other senior managers and asked them to meet him. At the meeting he floated the idea of a management buyout (MBO).
The production manager immediately counted himself out as he was too near to retirement. The other two, who like Clarke are in their 40s, were more open to the idea but with mortgages and children still in education both expressed the view that it would be difficult for them to fund a share of the acquisition. However they agreed that Clarke should approach John Murphy and sound him out.
To Clarke’s surprise Murphy shot down the plan immediately. When pushed for a reason he said that three men with young families would be mad to consider an MBO in the current climate. He pointed out that the business was going to need considerable investment over the next five years to remain competitive and that the German company behind the offer had ample resources to do this. Selling to the Germans was the best possible way of safeguarding jobs at the company, he said.
The trio might have let the matter drop completely had the managing director designate been a chip off the old block. But within a short space of time it became apparent he was not. He paid lip service to maintaining the status quo in front of Murphy and his managers but behind their backs he was asking their subordinates for information that clearly undermined this. The managers quickly realised that once the deal was done their jobs would be far from secure. This refocused their attention with some urgency on an MBO as finding alternative employment undoubtedly meant uprooting their families.
Clarke managed to convince Murphy to at least consider an offer. Murphy reluctantly agreed but says he is under family pressure to conclude the deal quickly because of new health concerns. He is also concerned about the possibility of losing the sale to the Germans if he delays. If the managers want the business they have to come up with the full price or close to it by the end of the year.
As the only one with financial experience it has fallen to Clarke to take the lead on the MBO project and the other two are leaning heavily on him to prepare and mount the bid. He has no doubts about the financial viability of the company, which has a proven track record of profitability and a healthy order book. What really concerns him, apart from raising the money, is the make-up of the MBO team and whether their skill sets could ever be moulded into what the company needs.
None of the three have general management or materials purchasing experience and the imminent departure of the production manager will leave a big skills gap. The quality control manager says he could step up to the challenge of running production with some hand-holding but the head of design, who spends a lot of time overseas working with clients, says it is not feasible to expand his role into any new areas. Clarke is willing to take on the position of managing director, although privately he feels daunted by the breadth of the task.
Having spent hours crunching numbers Clarke now has a good idea of how much money is involved. The big question is where is it going to come from? At best the three managers can only come up with about 20 per cent of the purchase price between them. Clarke believes it would be possible to get this to about 50 per cent if other long-serving employees were given the opportunity to chip in. However, he is concerned about the complexity of ownership structure this might create.
He has been looking at venture capital as a possibility but recognises that a fund would typically take about a 30 per cent stake which still leaves a sizeable shortfall. In positive moments he thinks he might be able to cajole John Murphy into retaining a 20 per cent interest with the carrot of a deferred payment for the stake in a few year’s time.
The cautious accountant in Clarke is telling him that an MBO is at best a stretch too far and at worst lunacy given the economic climate and the limited financial and management resources available. In darker moments he thinks it would be best to forget about it and to accept whatever changes are coming down the tracks.
However, the instinct to protect his livelihood and the company Murphy has created is very strong and part of him simply doesn’t want the German bid to succeed. Clarke believes that getting the backing of other staff will not be difficult and those he has mentioned it to are very encouraging, pointing out that there is no perfect moment to take a risk and that now may be as good a time as any.
Should the management team proceed?
