Divesting a Business with Limited Potential through MBO

A family office had acquired, 6 years earlier, a wholesale business in the automotive industry. Primary purpose of the acquisition had been the real estate portfolio owned by the company. The wholesale business was considered a bonus and served as cash generator. The business was left to run by sitting management and the fiduciary advisors of the family office.

After 6 years most of the real estate of the company had been brought to value however the wholesale business cash generation had declined. It was even worse, the amount of working capital required to run the business had increased. The cash generator had become a cash consumer and was loaded with debt.

The family office decided to freeze capital flow to the company and choose to divest the asset. Given the negative outlook in the automotive industry a divestment on short term was preferred over a long book building process. Collecting cash fast was considered more important then realising profit on book-value on the transaction. All divestment scenario’s were open; Liquidation, MBI, MBO, Divesting to Suppliers or Clients, Private Equity, an Auction to Competitors.

Divesting a business with a strong seasonal cycle requires significant advanced planning. This becomes even more important when purchase and logistic cycles are long and the the available working capital is limited. The wish to collect cash fast from the business conflicted with the aim to retain value in the divestment process.

A Proces to Retain Value and Ensure Speed

Selling an asset to industry participants without a good understanding of the industry and business dynamics does not make sense. A quick strategic assessment was performed on industry outlook, wholesale and product/market dynamics, industry players and their recent M&A activity . The company was evaluated on its strategic position, financial and commercial performance and benchmarked against (available) industry values. The 2nd objective of the assessment was to sharpen the mind of management and to provide as the basis for information memorandum.

The strategic and business analysis revealed underperformance and dependency on some key customers and suppliers. Both limiting the scenario’s for divestment. Nevertheless a limited amount of potential buyers had been identified. With the aim to maximise both value and speed of a transaction, a tree way parallel path was chosen.
– A number of suppliers where offered the business, supporting forward integration of their business (cutting out the middle man),
– A limited number of competitors (consolidators) where offerend the business (consolidating a matured market) and
– The business was offered to Management (capturing relationship value and securing their own employment).

The original limitations of the seasonal cycle where transferend into a drive for urgency of potential buyer. The conflict of interest between several buyers had been used to create ” the opportunity to have lost” the business. Meanwhile the business was operated lean with a focus on short term cash generation to shareholders.

The Results..

Competitors where not likely to make decisions quickly, therefore the MBO was the best option for the Seller. Management however needed to gain appetite for the deal and the ability to finance the deal.

During the process the suppliers, upon their decline to invest in the business, had been forced to improve working capital conditions. Both Sellers and Management benefited form this result. Sellers by elevated short term cash, for Management it created the opportunity to finance a deal.

At the end the business was sold to Management in an asset deal. The transaction was financed by the same bank that financed the business originally. The somewhat relaxt supplier terms and the pressure of negotiations with competitors ensured that Management was confident on the value of the business. The combination brought a fair deal on the table.

Running the negotiations in parallel made it possible to reach agreement and a closing of the asset deal in less then 5 months after the decision to divest. The speed of the transaction reduced transaction cost and execution risks. Within 7 months after de decision to divest 95 % of the cash was harvested from the business. The left overs had bee secured in third party receivables. The final benefits significantly exceeded original expectations.

Comments are closed.