Special Report - Rising levels of MBO activity

Recruitment sector expects an increase in management buy-outs in the coming year

The global pandemic, in conjunction with speculation that capital gains tax will rise, has encouraged business owners to re-evaluate their strategic options and consider when best to realise the value of their assets.

A management buy-out (MBO) is one of a number of options and is common practice in the human capital sector, as founders look to support the continuing operation of the business by shifting ownership to the senior management team.

The speculation that capital gains tax was expected to move to be in line with income tax has proved to be the catalyst for a number of shareholders to undertake a vendor-friendly MBO. The deals do not focus on value maximisation and often are limited in terms of the level of cash proceeds available to the selling shareholders, but they create a structure that works for all parties and can be carried out in a relatively short frame with low levels of risk. The benefit of such a deal is that there is always a willing buyer in the form of the management team, which is clearly different from a trade sale or private equity-led MBO.

The speculation that capital gains tax was expected to move to be in line with income tax has proved to be the catalyst for a number of shareholders to undertake a vendor-friendly MBO”

The level of private equity-led MBOs did, however, remain subdued through 2020 as investors awaited a return to a more normal earnings profile.

The cyclical nature of recruitment businesses is commonly cited as a potential hurdle for private equity, so determining the sustainable level of earnings through a pandemic is exceptionally challenging.

There is, then, greater appetite to back businesses operating in sectors proven to be more resilient through the cycle, such as life sciences, renewable energy, healthcare or those operating an attract-train-deploy model.

The recent, founder-led MBO of G2V Recruitment Group, backed by Investec, is an example of a growing appetite to support high-quality operators that have developed market leading positions alongside an attractive growth plan. The sale of G2V was a competitive process; a number of the underbidding private equity funds are still seeking a recruitment platform. Other private equity-led sale processes are due to conclude in the coming months. We therefore expect to see rising levels of MBO activity over the next year as we emerge out of the pandemic and institutional investors seek a new platform.  

Mark Maunsell is director, business services, at Clearwater International.

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