Management Buyout vs. Private Equity – Understand Your Options

Should you consider a Management Buyout from within your company? Or go with external Private Equity, Strategic buyers or a Founder Investor? There are pros and cons with each approach, and the more time you allow to consider your options, the better placed you’ll be to make a decision that’s right for your company.

Teoh Capital

Teoh Capital is a private, family-owned investment firm. We acquire and hold software and technology businesses. We won’t sell your company to a rival. We take care of your employees, your brands, your products and services and your customers.

When we buy a company, we keep disruption to a minimum. Our focus is on our companies retaining business autonomy while we inject the capital they need for growth. Our experienced, global network of top talent is available to offer expert advice during all the phases ahead.

How are we different?

Our flexible capital enables founders to maximise proceeds via a two-stage exit, while retaining operational autonomy and benefiting from ongoing, direct access to our founder-investor, David Teoh. In practice, this means we offer ‘capital out’ options for founders to immediately realise the value of what they have built, but we also support them to retain the upside value from the growth capital that we invest to accelerate the growth and value of the business.

Private equity (Read more about “how private equity works” here) can also offer a two-stage exit to founders and investors (where this is an objective), Teoh Capital’s difference is to invest without a fixed time horizon.”. Due to fund structures and management fees, private equity and venture capital funds have a limited time horizon that may not align with the growth lifecycle of a company. Unlike those investors, we are not distracted by exit plans a year or two after a transaction.

Similar to venture capital investors, we can invest growth equity to accelerate growth and increase the value of the business and its impact on industries, however, we unlike venture capital (read more about PE vs. VC here), we provide founders ‘capital out’ so that they can de-risk upfront.

Finally, one of our key points of difference is the continuous and direct access that our investees get to our founder-investor, David Teoh and our investment team. We have unparalleled pedigree in founding, operating and growing software and technology businesses and can draw from decades of experience.

Comparison of Teoh Capital to other sources of capital

Teoh Capital Private Equity Venture Capital Trade / Corporate Buyer
Capital out – vendors can realise value
Capital in – growth equity into companies
Vendors maximise proceeds via 2-stage exit while de-risking today
Company management retain operational continuity
Material, dedicated operational input – not just ‘support’
Direct, local access to founder-investor
Streamlined, single-layer and agile investment decision making

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Fundraising is often daunting for business owners. Raising capital can allow the company to flourish, but finding the right investment partner can be time-consuming and difficult. Asking for money might be outside your comfort zone. Not asking for it can keep you small.

Choosing the right investment partner comes with risk. Get it wrong, and your business can run into trouble or even fail. You want opportunities for growth and sustainability, while keeping autonomy over your product development and direction.

The process of securing private equity can be fraught, because it’s frequently transactional and data-driven. It often provides little benefit to the workers and executives who founded these companies. It can disregard the needs of consumers.

But with the right private investor, the story can be very different.

The benefits of partnering with tier 1 private investors

  • Business sales can be increased and organisations strengthened
  • Enhanced value with proven growth strategies
  • New product development ideas
  • Attraction and retention of top talent
  • Setting up to scale in existing and new markets, including offshore

Teoh Capital brings decades of experience to our family of software and technology companies. We understand the market and appreciate the legacy of a company and the vision of its founders. Our capital allows for sustained growth and our network of talent opens opportunities that can’t be reached by a business alone. For a deeper understanding of the private equity process, check out our article on ‘What you need to know about private equity‘.

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Developing an exit plan

Ideally, you’ll sell your business at its peak. Too often, business owners don’t look far enough ahead. They don’t read the market effectively and panic-sell once their business is tanking.

You want to maximise returns. Prepare for your exit properly and several years ahead if you can, bearing in mind things might change if the technological landscape shifts unexpectedly or you lose a few key clients or competition intensifies. Preparing an exit plan is about your business legacy, but it’s also about taking care of the employees who’ve worked hard with you on your shared purpose.

To plan well for your exit:

  • Give yourself enough time. The process of finding buyers might take longer than you think.
  • Keep your foot on the accelerator until you’re over the finish line. Too often business owners mentally ‘leave the building’ while they’re still meant to be operating the company. You’ll be able to downshift soon enough. For now — focus on developing and delivering great products and services.
  • Keep developing your people. Incoming owners want smart teams who deliver results. Your career might be taking a different step but your staff likely intend to stick with the business, so it’s important to stand by them until the very end.

What sort of exit is right for you?

To exit, the basic options are to sell to a management team member / successor, or to partner with an external investor (be it private equity investment, venture capital or a founder investor). Sometimes, senior managers within the business take over operations. It can be a great way of ensuring continuity and maintaining existing relationships. There can be risks, though, including financial risk if the buyout is in instalments. You might find offers from within the company are lower than external ones. The MBO process tends to be more cumbersome and often takes longer than a process with an external buyer.

The more time you give yourself to muse over your options and come up with solid future plans, the better the deal you’re likely to strike. This moment has been coming since you first had the idea to start a business. You want to do all you can to make the most of it, and honour the years of work you’ve invested bringing your business to where it is now.

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