UK: Private Equity vs. Trade Buyouts – Five Points Of Difference For Management Teams

Last Updated: 15 August 2019
Article by Andrew Mills and Ryan Brown

Whether you're a private equity executive or trade buyer, on the buy-side or sell-side, in the context of an M&A transaction it is critical to understand the expectations and concerns of a target company's management team. In a seller's market the willingness of the management team to embrace a new owner is all the more important, and buyers can also help smooth the transition and build a healthy long-term relationship by keeping the management team at the forefront of their plans.

This month we compare private equity buyouts and trade buyouts, highlighting five key differences as a management team may perceive them, and how they might be managed.

1. Relationship

Private Equity

The success or failure of most private equity buyouts will heavily rely on the relationship between the private equity executives and the management team. The initial investment is usually as much in the individuals as it is in the business.

The relationship should be a symbiotic one. Financial reporting is a good example of where this relationship cuts both ways. Whilst a fund may have a rigid set of metrics it needs to measure against, the management team may already capture different and more meaningful data that may be key in managing the direction of the business. Equally, management should be open to listening to their new partner as they will bring a fresh perspective and may see things that are not apparent to a senior manager that is already ingrained in the business.

Trade

While a management team that follows a business into its next phase is attractive to a buyer, more value in this context is placed on the underlying products/services and infrastructure.

Integration will be a high priority for the buyer and the management team may find they have new bosses for the first time in a while. Everyone involved in the acquired business will have to adapt to a new way of doing things and it is the management team's responsibility to deliver this as harmoniously as possible.

Managers should also be prepared to up their game. Whilst a business may have found a sweet spot under manager ownership, as part of a larger group, individual business lines will be expected to increase performance to support under-performing parts of the business.

2. Expectations

Private Equity

Performance expectations should always be clearly set out in both discussions and the transaction documents. With the increasing popularity of earn-out payments, this is often the case but is not a given. Making sure that the private equity house's and the team's five year plans align before the transaction is completed will often be an indication of whether the relationship will bear fruit.

Providing a mechanism for rewarding over performance can also help clearly define expectations and demonstrate a willingness for everyone to share in the short-term upside and not just at exit.

Being clear about any debt package, and providing satisfactory details to the management team, should also be a priority. Ultimately, the management team needs to be comfortable that the business can service the debt.

Trade

Trade buyers will often place value in the management team's own trading projections. In the current economic climate of uncertainty, it is important that expectations are set at a realistic level. Overpromising at the outset can lead to false expectations on both sides and provide a cause for the relationship to sour later on.

3. Control

Private Equity

Given the relative size of the private equity fund's investment, it is reasonable that a private equity buyer will expect the last say on all matters. Having said this, the buyer will still rely on the management team's expertise and experience.

The private equity house therefore will usually have majority rights with respect to board appointments and decisions of the directors. Management may feel like their board positions are hollow, given the private equity house's typical veto rights. An effective way of bringing both sides together can be to appoint an independent non-executive as chair. Ideally the individual should be agreeable to both management and the private equity house, and have relevant industry experience, as well as solid credentials in private equity.

Trade

As the business will become a subsidiary within a larger group, key strategic and operational decisions will now come from higher in the structure. Where the acquired business has previously been owner-operated, the buyer will need to consider how best to manage the team's transition from decision makers to decision takers.

As part of a wider team, individual managers' profiles will naturally take time to build within the new group. Notwithstanding this, managers should be made to feel that they have the flexibility to grow otherwise they may head for the door shortly after the deal has closed.

4. Progression

Private Equity

Arguably, private equity buyers will provide managers with greater scope to grow and contribute. The equity incentive offered in a private equity context clearly gives managers a platform to benefit directly from the continued efforts to grow the business. Equally, private equity executives will be spread across a number of portfolio companies and therefore any team that proves itself capable with minimal input will quickly garner favour.

Trade

In a trade context, any acquisition will most likely be in connection with a wider vision for the group. Whilst key managers will have an influence on the destiny of that particular business, their overall influence will be diminished. Each manager's incentive package will need to be carefully tailored to encourage that individual to continue to improve and innovate.

5. Final Outcome

Private Equity

Acquisition by a private equity fund should represent the closest alignment of interest between management and ownership. Managers are clearly incentivised to maximise growth as they will share in the upside at exit. However, private equity buyers should be aware of each manager's own exit strategy. Whilst the private equity house will demand a clean break, it should be aware that key management will need to buy-in to the chosen exit route. Equally, where a private equity house will want to maximise returns, management must also be concerned with what is right for the business. Is the business large enough to go public? Has it gone as far as it can as an independent and is it time to consider a trade sale?

Trade

Managers typically enjoy greater security under trade ownership. The long-term potential upside is clearly lower than in the private equity context. However, managers enjoy the benefits of being part of a large, well-established group: salary, pension and benefits. Moreover, managers will enjoy the benefits of diminished responsibility e.g. tax filing and HR matters. Clearly, managers will be expected to perform against targets, however, the stress of ownership has been removed. The key for any trade buyer is to encourage its management teams to be business leaders without being business owners.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions