Management Buy-Outs (MBOs)

Traditionally, less than one in five business owners would consider selling their businesses to their management team and usually for good reasons – Management Buy Outs (MBOs) needs careful thought and planning. However, things have changed, as over the last ten years or so, MBOs have become more popular with a number of key advantages but which must be weighed up against the potential pitfalls.

Advantages of an MBO

Quite simply, rather than have to go to the market place, the buyer has instantly found and confidentiality can easily be contained in-house, which is a great starting point. The balance of power can be transferred steadily and the business can continue with minimum disruption with people who are more likely to care about the history and who can be trusted in maintaining the legacy of the current and previous owners. The risk involved in a relationship change can therefore be minimised.

Disadvantages of an MBO

As with most things, there is a potential down-side, starting off with a market of one! A trade sale could have half a dozen potential purchasers, where an offer price could be double that of others for strategic reasons. Funding may be an unknown issue with an MBO to start with, whereas trade buyers would need proof of funding, normally before negotiations even get started. Should discussions get underway for an MBO then there could be the risk of the management team not keeping their eye on the ball or just as bad, a demotivated management team, should the deal fall through.

Financing an MBO

Although in the past, funding may have been an issue with MBOs, (i.e. the buyer having limited financial resources to borrow money from traditional lenders), the Alternative Finance Market now offers a more favourable view, as they will show preference towards a new owner considered competent to run the business, thereby reducing the element of risk. And what better, if the new owner has first hand knowledge and experience of the actual company. In fact, given a choice, the Alternative Investment Market would much prefer to lend money for an MBO rather than to an complete outsider, as a Management Buy In (MBI).

The Key to Success

The starting point is a clear understanding as to whether or not the management team will have the appetite, ambition and leadership capability to grow the business, followed by access to finance as otherwise it’s no deal! Specialist help and advice should be sought to ensure that a succession plan is carefully implemented so that a flexible, staged exit can be managed, ensuring that sensitive issues and individual aspirations can be dealt with. A succession plan will also ensure that the business is made as attractive as possible in order to achieve the necessary finance and of course, the owner’s asking price!

What to do next?

For more information about Financing an MBO, simply complete the form below: