How to navigate a management buyout at your agency

London agency Shape History, which specializes in marketing socially conscious and sustainable brands, announced its management buyout just last week. Former co-managing directors Lauren Kay-Lambert and Ed Fletcher are taking the business over from founder Mike Buonaiuto.

For Buonaiuto, it’s a chance to put the business he built over seven years in trusted hands. While for its buyers, ”it’s an opportunity toachieve the vision for the agency that we want,” says Fletcher. ”We don’t necessarily measure success by revenue and profit. We measure it by impact and the change in the world that we can see, so it is about how we can continue to build and shape and mold an agency that can work towards that goal.”

The mechanics of a management buyout can be complex. Shape History’s new owners have used a vendor-initiated management buyout (or vimbo), where the current owner approaches prospective management with the proposal and a suggested funding structure. Typically, it treats the sale like a loan, with repayments made in stages, with interest applied over time – in Shape History’s case, to the benefit of Buonaiuto and Danny Witter, an angel investor who backed the agency when it was founded.

This approach means prospective management buyers don’t have to raise funds outright themselves, meaning the business doesn’t have to take on extra debt and that it is available to buyers who aren’t already wealthy.

Fletcher explains: ”We’ve got a repayment structure with [Buonaiuto and Witter] over the next five years, which starts immediately. We looked at a number of different options and models, like bringing in a backer or a loan. But the vendor funded model enabled us to not have to bring in another party... and with interest rates at the moment, there was equally a risk with a loan.

”The vendor funding model, with that repayment structure, made the most sense to both the individual stakeholders, and for the security of the business.”

‘I essentially bought the owner out with his own money’

Digital marketing agency Builtvisible also utilized a vimbo when Geoff Griffiths and his management team took over in 2019. Griffiths says of the acquisition: ”I’m not some kind of minted millionaire. I don’t have the capital to buy a business. But I had a non-exec come in and help us structure and broker this deal, and ours was very friendly. The price we paid was money that we structured as a loan over a number of years – so I essentially bought the owner out with his own money.”

There are other routes to an MBO, however. When Eric Campbell took over Edinburgh-based design and content agency White Light Media from its founder Fraser White in 2019, he raised funds via government-backed loans and was able to have ”a clean break”.

”It was quite a drawn out process. I looked at a few options, like paid invoicing, but that wasn’t going to prove a good way for me to do it. So I went to [Scottish business advice service] Business Gateway... and it took me through the process with one of its business managers and suggested finance partners. I ended up working with DSL Business Finance and government-backed loans.”

‘Not just one guy as the owner with lots of money’

In many cases, agencies transfer from a single owner to co-ownership by two or more parties. Getting those interpersonal relationships right from the get-go is essential to keeping the business on a steady footing.

At Shape History, the new owners worked ”openly” and ”collaboratively” on the MBO and Fletcher says it has been key to ”be really open and honest about red lines right at the start, and by having those conversations up front there were no surprises”.

Builtvisible’s new owner Griffiths similarly says the MBO ”was a great opportunity to bring in some other people”. This included his COO, CCO and finance director, alongside himself as majority shareholder.

Just like an agency merger, keeping current staff in place and happy is central to a successful transition and some agencies choose to offer key staff share options to give them a small, but real stake in the business’s fortunes. Builtvisible, for example, offered staff enterprise management incentives (EMI), a form of tax-efficient share option that Griffiths says allowed him to bring far more people on the journey. ”We’re able to give the wider team shares and be much more aligned as an organization, rather than just one guy as the owner with lots of money.”

‘We wanted to incentivize them to think long term about the company’

At Space & Time, which went through its MBO in 2018, managing director Chris Jones also offers an EMI scheme. ”We wanted to think about the next tier of management and incentivize them to really think about the long term future of the company,” he says.

It’s not just abut financial incentives, though. Staff will naturally have questions about what new ownership means for their security and career prospects. For Space & Time, the MBO allowed Jones and his partners, alongside its 130-odd staff, to ”reset” the business in their own image and focus on new opportunities in the market.

Builtvisible’s Griffiths says answering the concerns of staff and managing the transition as transparently as the process allows was essential. ”I pitched my vision and brought the team into the loop. It’s about creating a group of people who are all aligned to do the right things for the right reasons.”

Outgoing owners still need to be kept on side – after all, they’re the only people who know all the ins and outs of the business. At Shape History, Buonaiuto will stick around to support and advise the new owners, while over at Hampshire-based full-service agency Escape, new owner Ian Mumford is keeping founder and former owner Rob Jones around as its chief commercial officer.

With Escape's MBO announced just a week ago, Mumford tells The Drum the move will help ”drive the agency towards a thriving new chapter of growth.”

At White Light Media, Campbell says he has kept in touch with former owner White, particularly during the early months of coronavirus: ”We concluded the MBO at the end of 2019 and our Christmas do was his leaving do, so I kicked in as sole owner starting in 2020 and within two months Covid had hit us. Fraser [White] was one of the first to call me up and say: ’I am so sorry!’”

‘I’ve had to turn into a business person... wearing multiple hats’

Despite the fact that Campbell, Fletcher and Griffiths were already deeply involved in the running of their businesses, each says that transitioning from employee to employer is a challenge in its own right.

Griffiths says: ”Before my marketing career, I was a rugby player and I saw what bad management looks like. So I’ve got quite a bit of experience in the bank and I can look at it through both sides.”

For Fletcher: ”There are new things coming in, but we’re trying to keep ourselves grounded and not get ahead of ourselves too much, just focus on the job at hand.”

Campbell, who was formerly his agency’s creative director, admits: ”It has changed my perspective. Effectively, I’m a creative person – left-side brain and that sort of thing. I came into this business wanting to be creative and wanting to do design the whole time.” Now though, he says: ”I’ve had to turn into more of a business person, managing every aspect of the business, juggling plates, wearing multiple hats. It has been a learning curve and a half.”