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Factors affecting entrepreneurship in transition economies: An evaluation of the development cycles of Polish MBOs - Page 3

Management Competencies

The preliminaries associated with MBOs - assessing the suitability of the business for a buy-out, approaching the potential seller and considering the level of investment (Pearson 1990) are the first test of management abilities. The potential MBO does not have to be profitable at the time of acquisition to be a viable proposition but clearly it should be demonstrable that profitability can be achieved under the new order. Other management competences necessary include constructing a business plan, negotiating with interested parties and subsequently running a business (substantially different from managing it for others).

Considerable attention is also required in assessing issues such as industrial sectors, management and financial controls, the nature of the market and the firm's position within that market (Wright et al 1994). Motivation and leadership are also important as is the ability to take tough strategic decisions such as downsizing. Management team motivation is treated as important in several studies. Green (1988) discussed the benefits of management ownership such as an increased commitment to innovation, potential increase in profitability and discussed four motivating factors, self-interest mutuality, responsibility and control. In a later paper, Green (1992) suggests that organisational decision-making processes and the implementation of cost-reduction strategies had negative effects on motivation.

Managerial skills in the normal functional areas are important (Ward 1992) but so is developing further management skills for the new company. Management and staff development strategies will necessarily be tailored to the business policy of the management team and should not be overlooked.

Finance

A number of crucial issues have to be dealt with when considering the financing of an MBO. Aspects such as the value and expected price of the acquisition (not necessarily the same) and choosing the best advice, arranging appropriate levels of finance and financing mechanisms are important. Selecting financial institutions in terms of what deal they can offer the management team and conditions of support require evaluation.

MBOs are usually financed by a mixture of equity and debt (Wright et al 1992). Whilst, as Wright et al, (1988) noted that the US buyout market was characterised by significantly higher levels of debt than in the UK , MBOs in this country have carried an extensive debt level. Faced with many financial institutions to choose from, ranging from the clearing banks and venture capitalist through to specialist debt and equity fund providers (Robbie et al 1992) and with different investment requirements, potential MBOs have to strike a balance between equity and loans. Pearson (1990) suggests that expert advice is necessary as financial and legal matters involved may be well beyond the experience of the management team members. More than one advisor is the norm although Wright et al (1988) found that 3.8% of MBOs appeared not to use an advisor.

Other important issues include the transfer of pension fund assets and liabilities and dealing with restrictions imposed by financial institutions including warranties and indemnities.

Negotiations

Negotiations for the setting up of the MBO can be lengthy and at times frustrating. An important additional point is that the management team is in a relatively vulnerable position; effectively the management team is negotiating with its employers and, if the MBO proposition is unsuccessful, they may have a desire to retain their current positions. Professional advisers have an important role to ensure that negotiations do not prejudice the positions of the managers involved and on occasion may seek an undertaking that the parent company will not enter into negotiations with an outside organisation until the MBO proposition has been resolved.

A number of parties will be involved in the negotiation process, the management team, the parent company, providers of finance and professional representatives of all the parties concerned. Essentially the management team should be ascertaining as far as possible that the resulting buy-out will be a fair reflection of the value and selling price of the company to them and that they possess the assets with which to operate the company. The rights to any trademarks or other intellectual property rights, goodwill, etc., should be included together with a survey of the tangible assets of the potential MBO (Pearson 1990).

Wright et al (1994) warn that controls against management opportunism have to exist in privatization MBOs, for example to ensure that managers pay a fair price for the purchase of public assets but that such controls should not stifle management motivation to undertake the risk of buy-outs and thereby lose opportunities for efficiency gains. Wright et al also argue that the sustainability of former public sector MBOs depends greatly on their ability to meet the increased competitiveness or product and product life-cycle restrictions.

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