More than a third of management buyouts in the UK since the start of the year occurred at companies in administration, as private-equity firms target failed businesses. Private equity firms with cash and those less reliant on debt have been particularly successful in this regard.

Research on the first quarter of 2009 by the Centre for Management Buyout Research (CMBOR) shows companies in administration surpassed family-owned and closely held businesses as a source of management buyouts for the first time since CMBOR began gathering data in 2000.

Since the start of the year, of 61 management buyouts in which managers of a company bought the company they work for — usually with the help of private-equity funds — 38% involved companies in receivership. This compares with 11% for the whole of last year and 5% in 2007

These deals, which tended to be smaller in size, constituted 14% of all management-buyout deal value, which is £1.95 billion ($2.84 billion) so far this year. Although about half of management buyouts are private-equity backed, CMBOR said, these transactions make up the vast majority of total deal value.

Conversely, family-owned and closely held companies were the source of 28% of deals in the first quarter, compared with 42% last year and 41% in 2007. Secondary buyouts fell to just 7% from 19% last year.

Of the £1.95 billion in total value of the 61 UK management-buyout deals, two-thirds was from one deal: U.K. buyout house Permira Advisers LLP, News Corp. and NDS Group PLC taking television-technology company NDS private. It has been the slowest quarter by number of deals since records began in 1990.

In the final three months of 2008 there were 92 deals worth a total of £1.3 billion, and in the first quarter of last year there were 152 deals worth a total of £7.5 billion.

If the market continues at this pace it will be the slowest year by management buyout volume since 1981, when there were 152 deals worth a total value of £267 million. It would also be the slowest year by value of deals since 1995 when there were 598 deals worth a total of £5.6 billion.

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Peter Harkness (above) and his business partner, Owen Davies, bought Highbury Communications, the North London-based publisher of many well-known newsstand magazines out of administration in 2006. The businesses downfall occurred after it had taken on too much debt – some £26m. This debt was mainly due to some disastrous acquisitions and the overly ambitious launch of new media products.

How Peter Harkness and his partner turned the company around so that it is now making a profit of £1m is an interesting story. The main focus was to get rid of the loss making magazines and concentrate on the “special interest” magazines that have a more loyal subscriber base. Due to the increased profitability of these new titles only 30% of the revenue now comes from advertisers. Profitability was further increased with the setting up of ecommerce websites closely linked to the actual titles.

Another successful entrepreneur, Simon Elliot (above right), saw an opportunity when the company he was interested in collapsed due to a £1m tax bill. Problems that were uncovered included a finance director who had been stealing from the company due to lack of oversight. One of the main attractions of the company were the long term contracts.

Both Elliot and Harkness found their target companies through careful research. Harkness says he ‘used to spend hours and hours downloading files from Companies House’, and Elliot’s successful bid came after two previous potential mergers had fallen by the wayside. Of course another great source of information is the Business Sale Report, where companies that have gone into administration are listed on the site each day.

Stuart Wilde just just saw a business, liked it and just bought it. Stuart was in the middle of a home renovation project when he found out his favourite supplier had gone under. Stuart was relatively wealthy but at 52 he had ‘itchy feet’. He jumped at the chance to buy the company, even though he had no experience in bathrooms or in retail.
‘I did question my sanity for a couple of minutes,’ he says, ‘but I felt there was a good business there, and the main reason it had gone into administration was because the previous owners had spent £750,000 doing up the showroom without thinking about cashflow.’

So what have the entrepreneurs learnt from their experience. A number of key lessons seem to have been learnt.

A more detailed version of this article where readers can gain more insight can be found by subscribing to the Business Sale Report

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