1 Introduction Bonar Paint is a medium-sized paint manufacturer set up by two brothers, Jim and Bill Bonar. Turnover has been static for some years and both brothers are now wanting to retire from the business. The brothers have created a loyal workforce and feel that this loyalty will be strengthened if they sell the business to the three senior managers: Roy Crawford, production manager; Tony Edmunds, sales and marketing manager and Vernon Smith, chief accountant. The three managers recognise that this is a major opportunity for them to change the direction and growth of the company, but one that will involve the raising of significant loan and equity finance to buy the business. Equally significant are the equity stakes of ￡100,000 from each of them, which the banks will require to show the senior managers’ personal commitment. Company product range and processes Bonar Paint makes high quality specialist paints for a range of industrial customers. Its major customers include car manufacturers, steel makers and the oil companies investing heavily in offshore oil rigs. Bonar Paint also supplies many smaller industrial customers. Raw materials are sourced from large chemical companies. Jim Bonar has the necessary chemical expertise and Bill has the complementary sales skills to meet the specialised paint needs of their demanding customers. Bonar Paint has a good reputation for product innovation and its product range of over 200 paints include paints able to tolerate harsh and demanding conditions. The small research and development team, headed by Jim, has an excellent track record of meeting the technical demands and timescales for developing new high performance paints. New paints are normally developed in response to customer demand and, consequently, there is no formal process for new product development. Replacing Jim’s technical skills and leadership will undoubtedly create problems for the senior management buyout team. Jim and Bill have taken all the key strategic decisions to date with little reference to the senior management team. Bonar Paint’s product innovation success has come at a price. Its product range is far too extensive to sustain with the majority of the paints produced infrequently and in small batches. As a consequence customers often experience long lead times when ordering a particular paint. This results in higher than necessary stock levels, much of which is unlikely to be bought. Paints are supplied directly to each and every customer. Unfortunately, its management information systems fail to show the profitability or otherwise of individual paints and the future demand for the paint. There is little communication between sales and the research and development part of the business. Roy Crawford has consistently argued for the benefits of reducing the product range and increasing the size of the batches produced. Such a policy would give him more control over production, and lower costs. Higher volumes would also justify investment in new production technology, which would bring labour savings with fewer and less skilled workers needed to operate the new machinery. There has been little recent investment in new plant or machinery. Simplifying the product range would also improve quality and reduce expensive warranty claims when paints fail to perform. in a hostile environment. Such claims require extensive investigation to determine where the responsibility lies. Competitive environment Tony Edmunds, as sales and marketing manager, is very resistant to any attempt to reduce the product range. Such a move, he feels, would upset customers and lead to their defection to competitors. The UK paint industry is very fragmented – at the top end of the industry are large international paint manufacturers with significant brands and supplying both industrial and domestic paint customers. They produce in high volumes and offer a comprehensive but limited range of paints. At the bottom end of the industry are many small and medium-sized paint makers. Many have chosen to produce own label paints of the large Do-It-Yourself (DIY) retailers. Specialist paint makers, such as Bonar Paint, are finding it increasingly difficult to survive with neither the sales volumes nor brands to compete with their larger competitors. The industry as a whole is seen as mature and lacking in innovation. There is increased environmental concern about the toxic by-products of lead-based paints and the development of less toxic water-based paints is only slowly emerging. Even more worrying is the increased usage of plastics and other materials, which do not require painting. The DIY market is dominated by the same large international paint makers and the market for industrial paint is vulnerable to the usage of alternative materials and entry into the UK market by large European paint makers. Future strategy Each of the prospective buyout managers has a different view of how Bonar Paints should develop after the buyout takes place. Roy Crawford sees his proposed reduction of the product range and increased investment in new production technology as a means of reducing costs, improving margins and focusing on getting a larger share of their 3 [P.T.O. current large industrial paint customers’ needs. Product innovation should only come when there is a clear and profitable need for a new paint. He argues for a critical review of their smaller customers, believing them to be unprofitable. Tony Edmunds, however, sees an extension of the customer base as a necessary step in securing the future of the firm. The product range should be extended to meet the needs of the professional painters and decorators looking for high performance paints for use in both domestic and industrial applications. Tony also feels they should begin to make their paints available to the general public. He has seen the success of factory shops in other industries, whereby manufacturers sell unwanted and outdated stock to customers at heavily discounted prices at an outlet on the firm’s premises. Such as shop would be relatively simple and inexpensive to set up and bring Bonar Paint’s products to a wider public. It would require either the production, or buying in, of a range of the most popular paint colours used in home decoration. Finally, Vernon Smith is anxious that the internal control systems be improved to establish which paints are, or are not, making money. Investment in new paint ranges or technology should be resisted until the buyout has been successfully completed. In the longer term he feels that Bonar Paint is vulnerable because of its small size and that increasing size through merger and acquisition of similar sized firms is a sensible strategy. Vernon is also anxious that a fair valuation is made of the business and that the sales forecasts for 2007 and 2008, made by Bill Bonar, are Required: The senior management team has asked for your advice in evaluating the current position of Bonar Paint and its attractiveness for a management buyout. (a) Using models where appropriate, provide the senior management team at Bonar Paint with an assessment of its strategic position and its attractiveness, or otherwise, for a management buyout. (20 marks)