With the stock market stuck in the doldrums, the allure of a management buyout has never been stronger. But be warned: going private is a roller-coaster ride that requires guts, patience and the ability to hold on by the seat of your pants …
John Rackstraw is a happy man these days. Three months ago, he completed a management buyout of Pearce Group, the project management arm of residential developer Crest Nicholson. Now he's the managing director of an independent company, and loving every minute of it. He says: "Just to be unfettered from the problems and reporting structure of a corporate environment is a great feeling."

He isn't the only one. Ward Homes, Curzon Holdings and Holloway White Allom are all enjoying the independence, access to capital and general morale boost that flowed from their recent buyouts. With the stock market in a slump and a new wave of corporate governance rules about to hit public companies, going private has never looked more attractive to boards of directors. What's more, there are plenty of cash-rich venture capitalists eager to help them. Even the big boys are at it. Last month, Atkins chairman Mike Jeffries launched an unsuccessful buyout for the company, and then a couple of weeks ago Citex Group's QS arm was bought out by staff – including returning boss David Bucknall – two days after it called in the administrators.

Depressed share prices make it hard for companies to raise money on the stock market, which is the fundamental reason for becoming a public company in the first place. The FTSE 100 index has fallen by one-third in the past year, and is now 50% below its all-time high. To make matters worse, the City now rates contractors and housebuilders even lower than other sectors – contractors have a price-to-earnings ratio of about nine, which compares very poorly with the FTSE 100 average of 17.

"It's an issue for a lot of listed companies – they can't raise capital because of the horrible state of the stock market," says Richard Smee, head of the real estate division at Ernst & Young. "There's a huge amount of management time and cost that goes into keeping the City happy. Talk to any chief executive or chief financial officer – they all whinge about it."

Now that all that effort is bringing such little reward, these senior executives are beginning to wonder if the game is up. Smee says: "However good a management team may be, they get pulled down by the rest of the market, and that can be very frustrating. It's right to ask the question, 'what are we getting for all this?'"

The Higgs report could provide another incentive to go private. It calls for firms to employ at least as many non-executive as executive directors and for chairmen to be imported from outside the company. So far, Higgs' recommendations are just that, but many industry figures expect them to become mandatory for public companies, which already face more onerous reporting and accounting requirements than private firms. Smee says: "If you want to do a major rationalisation, it's easier to do it somewhat out of the public eye – private companies don't have to tell the City what they're doing."

Most of the recent buyouts in the construction sector have involved a business leaving its parent company to form a stand-alone private firm. John Rackstraw of Pearce Group says: "It becomes obvious that if you have a collection of businesses with no common theme, it makes sense for them to move in different directions. Our owner's strategy was to become a very good property developer, but we're in a totally different market – we provide a service, they provide a product."

Rackstraw led the buyout with backing from Lloyds TSB and Anvil Partners, which hold 5% and 10% of the shares respectively. Eight key managers, including Rackstraw, now own a stake in the company, and 24% of the shares have been placed in a trust fund for future allocation to employees.

The Pearce management first considered a buyout five years ago. Rackstraw says: "Back then, the track record of the buyout team hadn't been established, but there was a glint in the eye that if things went well there could be a buyout in future. Replacing the old management was part of the reason for the buyout."

He warns that pushing through a buyout is a slow, painful process. He says: "I read all the books, but they didn't describe it properly. You need super family support and the toughness of elephant hide, because you have to put up with excitement and exhilaration one moment and total disappointment the next. You also need a good team in place to run the business when you're concentrating on the buyout negotiations."

Ask anyone who has been through a buyout, and the chances are they will give you similar advice. Managing director Bob Cole completed a buyout at specialist contractor Holloway White E E Allom, a former Laing subsidiary, last November. He says: "It took 11 months, and it was a roller-coaster ride of emotions. You have to be passionate about the business you're buying, otherwise you won't have the motivation to drive the process through. Without that passion, there would have been some points when we'd have said, 'this is too much, let's give up'."

There are many points along the road where the buyer's courage – or patience – can fail. "You have to be patient, because it's a lot harder than anybody thinks," says David Freeborn, who led the buyout of fit-out firm Jarvis Newman from its parent Jarvis in 2000. He says: "There are three beauty parades you have to go through. First you need to agree a price with the vendor. Then you have to find a venture capitalist who's interested in the deal – you have to pitch to between four and 10 of them, and they're looking for a rate of return of 30-40%." The good news is that, according to one senior investment banker: "Venture capitalists have done lots of fundraising over the past year, and are awash with cash."

Once you have got your venture capitalist on board, you come to the last "beauty parade". Freeborn explains: "You need to pitch to the banks, because you need debt as well as equity to finance the buyout. Then you've got to agree legal documentation between all parties, which is a fairly tortuous process."

The buyers need guts as well as patience, because failure is a real possibility, and the leader of an unsuccessful buyout is often marked for death by any new owners. Last October, Laing Homes' managing director Steve Lidgate lost out to a £250m bid from Wimpey, and left soon afterwards. At the time one City analyst said: "Steve couldn't raise the cash like Wimpey could. Once that happened, he was always going to go."

If the buyout team survives the roller-coaster ride and manages not to fall off at the end, the payback can be tremendous – provided the backers can be paid. Freeborn says: "If you stay the course, you can sell the business on in three to five years for 10 or 20 times what you paid for it." As he says this, it is easy to imagine him planning how to spend his gains. In the meantime, he says: "I much prefer to be my own boss."