How to handle a management buy-out
Alan Horridge of fashion wholesaler Americana gives us the inside story of his management buy-out
You sense Alan Horridge has been let off the leash. The former FD of Manchester-based fashion wholesaler Americana led the £20m management buy-out of the company, backed by Isis Equity Partners, and finally took over as MD on August 7 last year.
As he discovered, complex transactions like these are a long time in the making, even when all parties come to the table amicably. Initiated in January 2003, founders Nayef Marer and Barrie Suddons were looking to exit and Horridge was keen to add equity to the role he had played for the previous couple of years.
On a day-to-day basis he was already responsible for running the business, but in terms of ownership he had none and when it came to an expansion strategy his colleagues had the ultimate power of veto.
By the time we catch up, in the midst of winter, Horridge has lined up a distribution deal to give Americana’s Hooch and Bench street fashion brands wider reach. It’s a move the founders would have been decidedly sensitive about. It has often been stated that key to the success of the labels is the fact they are not mass market, and thus not over-exposed and ‘uncool’.
Horridge is adamant this remains the case with his plans, and says the “philosophy will be the same”, although it’s clear he feels there’s more scope within that remit than was previously recognised. “It was always a bit more difficult pre-MBO,” he admits, despite growth figures most companies would die for.
The company’s chain of Westworld outlets finally looks set to open a store in London’s Covent Garden, and its German agent is actively working with the business to design clothing ranges specifically for their own market.
The MBO came about when the triumvirate in control – Marer, Suddons and Horridge – looked to reduce some of the equity for the two founders at the end of 2002. Fast forward eight months and on August 7 control passed to Horridge’s team and backers.
The main aim of the deal was that everyone would stand down from the negotiating table and shake hands. To illustrate the agreeable nature of the final deal, Marer remains part of the set up, and now works out in China with the company’s production office in Shanghai, which manufactures around 90% of all items. Meanwhile, Suddons has moved to France, but has been in phone contact. As you might expect though, Horridge did note a change in Suddons as the deal got close. “It clearly dawned on him that he was about to lose the business he’d been in for 15 years.” Fortunately for Horridge, it neither damaged relations nor the deal.
There were other stresses too. “It drives you bananas, with the amount of information and people involved,” says Horridge. “There was a constant stream of solicitors and financial advisors who all wanted information in a different way, and each had an opinion. Yet these people have never run a business in their lives.”
Particularly frustrating was the assessment of the firm’s debt collection. Horridge says no allowance was given for his knowledge of Americana’s debtors and his view that there would be no problem. “We had £50m invoiced out and only £4,000 of bad debt,” he says.
“Right at the death of the deal the bank got cold feet where the debtors balance was quite high and forced me to take out credit insurance against two debtors for £37,500. Yet within 30 days of the MBO they had paid as we expected.”
While initially, Horridge’s team had hoped to fund the deal with bank debt alone, it became clear he would have to bring in a venture capitalist. Ultimately, the £20m deal was made up of £7.5m senior debt from NatWest, with a revolving credit line of £6m, £300,000 from the management team of eight for 64% equity and a loan of £6.5m from Isis Equity Partners, which also bought shares to take a 36% stake.
And how is the company at ground level since the shake-up? Horridge recognises that some of the founders’ passion has been lost, but there have been gains elsewhere. For example, every member of the full -time workforce got a share option, and those who have been with the company four or five years will, he hopes, walk away with about three times their salary in profit. “Now everyone’s a shareholder the chemistry is definitely different and some of the things the founders didn’t want to do before, we can do,” he says. “Once a business reaches a certain level it’s easy to become uncomfortable about making strategic decisions.”
As well as the Covent Garden outlet there are plans for seven more stores in the next 18 months and a new brand is set to be brought in. “It’s been around in the UK for around 15 years and will fit the portfolio,” says Horridge. A taster of the kid’s clothes range was well received earlier in the year, and is to go into full production. Also in the offing are plans for shoes and licensing deals on sunglasses, among other items. “We re-looked at the brands. There’s nothing we’re doing that’s incredibly new, we’re taking the best ideas from everyone else.”
Horridge hopes the moves will increase the company’s turnover from £36m in 2003 to between £40m and £45m this year, and while it’s too early to be firming up exit plans, he’s got the interests of investors at the back of his mind. He expects the business to double its money in three years, and the pros and cons of flotations, trade sales, secondary MBOs or a buy-out by Isis are already being weighed up. For the time being though, there’s plenty to keep him busy.
CHOOSING THE RIGHT VC
It?s reassuring that Horridge was not short of offers from venture capitalists, proof that talk of green shoots of recovery in the mid-size market is not all hot air. The choice of VC was whittled down by the keenness of the investor, he says. We rejected 3i because it said it would be bringing along the person it was going to place as chairman to Americana?s presentation. ?I said don?t even bother coming.? And Lloyds Development Capital couldn?t match Isis? approach. The company was new to Manchester and eager to bank its first deal in the region. It also had the advantage of retail experience.
However, it appears, dealing with your investor is rarely simple early on, irrespective of how eager they were to fund you. Post deal, the first board meeting didn?t go to plan. ?We had lots of discussions to bring the meetings back into line. I guess we didn?t understand each other. Fortunately, the discussions cleared the air and we?ve had good meetings since.?
He advises that any business embarking on a similar deal should talk to investors frankly, before the first formal board meeting and understand their perspective. ?They?re worried about governance and, like bankers, view cash and debtor days as the most important thing in the company. We only looked at cash to see what we could use as a deposit or to repay debt. Most people here are driven by the top line sales numbers and only our FD and a few others keep an eye on the bottom line. This works for our business, and we didn?t want to change that way of doing things.? To keep all parties happy a 30-page monthly board package now covers all bases.