By Alex Dodgshon

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What is a Management Buyout (MBO)?

TAGS:  Business Exit Strategies, Exit Planning, Exit Strategy, Management Buyout, Maximising a Business Sale Price, MBO, Risk Management

A management buyout is one of the options available to business owners thinking about exiting their business. As with any business exit, the earlier you start to plan for it, the better chance you have of achieving the sale value you would like.

In this post we’re going to cover everything you need to know when considering or preparing for a management buyout, including the key benefits and tips for planning for a successful business exit.

Let’s start with the obvious question…

What is a MBO or management buyout?

A management buyout occurs when existing staff buy a company from the business owners, effectively buying their shares out. It involves some of the current management, usually directors or senior staff, coming together as a team. Once the management team takes full control and ownership of the business, it’s theirs to grow and drive forward.

Why would a business owner choose a management buyout over an open market sale?

Business exits happen for all kinds of reasons and are rarely straightforward. It may be that the owners are looking to sell off divisions of the business as part of a restructure, in which case a management buyout could be ideal. Retirement, a change in personal circumstances, or a desire for a new challenge – management buyouts can work in any situation. The owners might prefer to sell to buyers they know for philanthropic reasons. By knowing the team who will take charge already, they know the business legacy is in good hands, employees will be well looked after, and as a result they have less chance of regretting their decision to sell further down the line.

The benefits of MBOs provide some of the reasons why business owners may choose this format over a traditional open market sale.

Benefits of a management buyout

● Smooth handover – the new owners already know and understand the business, its operations, products and services, suppliers and customers.

● Less emotive transition – the selling owners already trust the new management team and don’t have to work hard to build a relationship as they would with a third party.

Possibility of a better deal – it’s possible that employees may value the business at a higher price because of their prior knowledge and emotional connection to it. They already know exactly what the business can deliver and don’t question the financials. A third party buyer will make a lower offer if they have doubts.

Strengthens business culture – MBOs promote openness, teamwork, collaboration and conscious preparation across the whole business, reinforcing business culture.

● Shared responsibility – the business owners set common goals with the MBO team and they all work together to achieve those goals and make the sale more attractive to all parties involved.

● Confidentiality is easier to maintain – MBOs involve internal stakeholders and often take several years to come to fruition. So while not everyone employed in the business needs to know, a wider group can be brought into the discussions and the possibility of confidentiality breaches is much lower than when third parties are involved.

Team dynamics – the people involved already have a successful track record of collaboration and working together, reducing the risk of clashing personalities jeopardising the sale.

MBOs have high success rates

For all the reasons above, management buyouts are likely to be more successful than an open market or trade sale. This aligns with our own experience of supporting MBOs across the construction, engineering and manufacturing sectors.

MBOs involve employees with existing knowledge, which makes for a smoother handover. Clients already know, like and trust the new business owners and have relationships with them. Overall, their high success rate comes down to the fact that all parties are working together towards a common goal. However, there are a few risks to be aware of.

Drawbacks of management buyouts

Obtaining finance – a common drawback of a business exit through MBO is obtaining the necessary finance to fund it. It’s unlikely the management team seeking to buy will have the shared personal wealth to fund their purchase. They will usually seek finance through bank loans, private equity firms, or in a deferred payment agreement with the current owner. Getting into too much debt will put the new owners under pressure to deliver, so we recommend taking advice in this area from a reputable corporate finance broker.

An owner who won’t let go – in the case of deferred payments, there is a risk that the business owner can’t remove themselves from the management of the business because they still have a financial interest. Drawing up robust terms and sale agreements can prevent this problem.

Risk of insider trading – it’s common for MBOs to take several years as the current owners and MBO team work together to build the required business value ready for sale. Unfortunately, there is a possibility that the MBO team may intentionally take action to reduce business profits and therefore de-value the business in the run up to its sale.

Planning for a management buyout

A typical MBO takes between 3-5 years. Careful planning will ensure it all goes according to plan. All parties need to commit to achieving the plan within the agreed timescales, including raising the necessary finance. Here are four essentials to include in your exit plan.

1. Set clear expectations of value
The business owner needs to be clear about the value they wish to sell for. Your exit strategy plan will involve supplementing this sum and outline how you will share the excess with the MBO team. Over-shooting this value target during the preparation phase provides a surplus that the MBO team can use as their contribution towards raising finance.

2. Set out how to utilise existing assets – agree how to document and automate operations and how to create additional revenue streams in order to reach the desired financial goal.

3. Set clear milestones and deadlines – if the business owners select the right team members and set the deal correctly, an MBO can bring cohesion to drive growth and hit goals.

4. Have a clear growth strategy and exit plan – agree common goals between all parties to make it easier to raise the required finance.

How we can help

Many businesses looking to plan for a management buyout work with business brokers like ourselves to define a clear exit strategy and provide the value of their business prior to exit. Book a discovery call to explore how we can help.

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