How to do a management buyout? 9 step plan

Profitable Management Buyout plan

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Many of our clients are private business owners who want to ensure a comfortable and enjoyable retirement for them and their families. They might also want to exit their business to pursue other career options or hobbies.

One business exit strategy is transferring ownership to existing staff in a management buyout. Below are the tips we usually give business owners when we start working with them through an MBO process.

Looking for a handy checklist that will walk you through all that’s needed when preparing your business for sale? We’ve created one with all you need – and you can download it here.

1. Set your own goals

Ask your financial advisor how much money you will need so that you can enjoy the retirement you want. This has nothing to do with your business’ value and everything to do with your lifestyle and household expenditure. Clarifying this amount will allow you to understand how much you need your business sale to provide for you.

Also, make sure that the number you come up with is not then used as the total business value but what you actually will receive on completion. Having these goals clarified will ensure you will be able to enjoy your retirement to the full.

2. Understand the value of your business

There are various ways to receive value from your business: before, at or after sale. Some ways of extracting value include:

  • taking business premises into private ownership (before sale),
  • extra pension contributions (before and at sale),
  • additional cash/bonus payments to boost salary (before sale).

Working with your financial advisor and tax accountant alongside the MBO plan helps to set achievable goals. These goals should be satisfactory for both you and your MBO team.

The combined value of all these actions gives the total sale value, not just what is paid at the day of completion.

3. Select your management buyout team

MBO team

The MBO team needs to consist of members with complementary skills, ambitions for growth and be open to change. Create the perfect team that will help your business prosper for years to come. Below are some considerations and ideas:

  • Start with key employees who you would worry about if they decided to resign because of how vital they are to the running of your business.
  • Consider the skills of potential MBO team members: do they tick all the boxes in terms of being good leaders and having financial and operational competencies?
  • Are your staff ambitious and would they even want to own a growing business?
  • Have your employees been proactive already, suggesting improvements, driving processes and leading people?
  • Are there any skills missing and would the MBO process benefit from finding an additional person?
  • Do potential MBO team members have the support of their own families?
  • Can the team you select work together with each other once the dynamic alters?

4. Select the future MD

Often a business cannot run by committee alone and there will still be a need for a single MD/CEO. From your selected team, there still needs to be one leader.

Consider the following questions:

  • Who has the skills and knowledge to replace you?
  • Will the MBO team accept your decision?
  • Who will replace the new MD in their current role? If this person does not exist in the business, then you may need to train up or recruit a replacement (BIMBO).

5. Agree the plan

Finance for your team is easier to secure on a growing, low risk business. The assessment of the value of your business (as mentioned in step 2 of the process) will provide a clearer idea of what needs to happen to allow the team to raise the money to pay you at completion.

MBO plan works best when you can allow sufficient time for transition into new ownership. This time is used to build up value and reduce risks. Depending on the stage your business is in, a good plan can take up to 5 years or even longer.

During that time, your role as business owner should diminish. The goals you set to achieve growth in your business have to be owned and delivered by your MBO team.

You will need to agree what milestones will be hit and within what timescale. These need to me achievable and measurable. They should also provide clarity for the MBO team and make them feel secure that as long as they hit targets, they won’t be gazumped by a better offer from outside of the business.

6. Remove risks

There are usually three sets of solicitors involved in an MBO: the team’s, yours and the funders. It pays to spend some time getting your legal ducks in a row so you can avoid additional fees.

Make sure all of the below elements are in place and up to date:

  • employee contracts,
  • terms of business,
  • environmental policies,
  • sustainability policies,
  • privacy policies,
  • equality policies,
  • NDAs,
  • etc.
Management buyout risks

Additionally, consider financial housekeeping. Make sure you have management accounts. Also, work to reduce overheads and manage cash flow so you are able to address any unforeseen circumstances. At the same time, do not be afraid to invest in driving growth.

7. Be legal

Ensure that you exit with a clean bill of health on all tax matters. Make sure your salaries and dividends are paid in an efficient way that follows regulations. Work with your accountant to ensure the contents of your books don’t cause disputes or delays.

8. Monitor and review the plan

Key to building a team is regular communication. Agree the KPIs you will report against and how often. Set clear responsibilities and hold people accountable. You are still building the team and they need to trust each other that they will all contribute as required and you know you are on track.

MBO plan

9. Get professional help

With skills in finance, management and operations, business brokers help manage the entire MBO process. We guide you through the process, including getting to know your company health as well as growth potential.

We work with our clients over a period of years to support them in building value though coaching – becoming a trusted advisor close enough to understand the business, but with an independence to be truthful with you. If you’re considering selling your business now or in a few years, start with a free and confidential business valuation.

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