While many articles and blogs focus on the business owner in relation to Management Buy Outs (MBOs), this article focuses on the key considerations for the management team.
For many managers an MBO will be the first entrepreneurial step in their professional life and it requires a degree of confidence, courage and, of course, support.
Here are the key areas a management team should address:
Finance can be derived from a number of sources ranging from venture capital and private equity, to banks and alternative finance providers.
Temptation is, naturally, to lean towards the cheapest finance available. However, this may not always be the correct cause of action as business growth will require investment and place strain on current working capital resources. A bank may not be able to be as patient as a private equity or venture capital investor.
Corporate Finance companies run a number of financial models to create the best mix, and tend to have strong relationships with funders to best advise the correct funding structure.
Funders would expect that each member of the MBO team would be willing and able to contribute an amount equal to 1 years’ salary towards the transaction. This is a daunting investment for anyone and will, in many circumstances, require a personal loan of sorts. Remember that this is an investment and will enable you to influence the direction of the business and benefit from the profits going forward.
Every business requires a leadership structure and a designated CEO/MD. While input should be encouraged in a business, the buck must stop at a specific desk. Within a management team this principle can be lost as each member may have contributed equally to the buyout and hold equal shareholdings.
Spending time understanding and creating a bespoke shareholders agreement is one of the most important and difficult things to do. The creation of this document requires the management team to answer difficult ‘what if’ questions about the future. These can be as simple as the exit of shareholder, the valuation of shares, or as complex as a shareholder dispute clause. It is the equivalent of prenuptial agreement for newlyweds.
Undertaking a professional valuation of the business is key. This will give you confidence and peace of mind that the company is worth the asking price of the outgoing owners. A business valuation will usually be on a ‘debt free, cash free basis’ meaning that the total consideration paid will be the business valuation, plus or minus the net adjustment for working capital. This is not inflating or deflating the price of the business, merely allowing the owner to extract the immediate working capital, or ensuring that the working capital obligations are met.
From the perspective of management, MBOs provide an opportunity to gain direct equity ownership of their business and create an entrepreneurial environment. An MBO is likely to be the best way that you and your team can build significant personal wealth, however it must be approached with the help of professional advisors.