This article has been submitted by Greenaway Scott
A management buyout (MBO) is a transaction where a company is acquired by some or all of its management team, usually through a new company which will have been set up for the purposes of the transaction. The size of a buyout can range considerably from Small and Medium Enterprises (SME) right through to huge corporate giants. MBOs are an attractive prospect as they offer an opportunity for a smooth continuation of the business, which is transferred to a team of individuals who are already familiar and knowledgeable about the inner workings of the company. Selling the company internally in this way, also means that the vendor is protected from having to divulge sensitive and confidential information about the company’s operations to a third party, making the transaction less risky than an arm’s length sale also reducing the necessity for a lengthy due diligence process.
Generally an MBO will take around 3-6 months from start to completion. Here are the main steps to follow in an MBO transaction:
- Build your experience and position yourself to be an owner – you will need to build a rapport with both the management and the employees of the company early on to prove that you are capable of running the company. There will always be a transitional period but if you prepare early on then it’s more likely to be a smooth one.
- Get a watertight business plan in place – potential lenders will need to see that you have a strong and viable business plan in place which considers and plans for the future financial projections of the company.
- Negotiate the deal – gain an understanding of what the other side wants. The seller will want to know that they are getting a good deal and the buyer will want to make sure that the management team is a key component of the succession plan for the company.
- Get the right finance in place – there are various different financing options available. A few of which are detailed below.
- Close the deal and start building your company!
Funding an MBO can be quite daunting. The finance required is often substantial and it is very rare that the management team will already have enough personal capital available to secure the transaction. For this reason most managers looking to enter into an MBO will turn to external funding to finance the transaction. Depending on the size of the business, there are a number of finance options available.
Bank funding – In deciding whether to finance the transaction, the bank will need to see that the company has a strong management team in place with a developed business plan. Lenders will look to assess the future profitability of the company and will typically seek to take some sort of security over the company assets in return for the funding.
Private equity – In return for their investment the private equity firm will usually seek to obtain an equity stake in the company in the form of shares. This form of return represents a higher risk to the private equity provider as, in an insolvency situation the shareholders would be at the bottom of the list of those to be repaid.
Mezzanine debt is a combination of debt and equity finance which usually yields a higher rate of return to the lender. Loans are not usually secured by assets but based on the company's ability to repay the debt from cash flow.
An MBO is not without its pitfalls, for many of the management team involved, the MBO will be their first experience as an owner of a company and the transition from a manager to an owner will bring with it its own set of challenges. Having the right team including corporate lawyers, accountants and corporate finance specialists on hand to guide you through the process is essential.
Here are some of the potential pitfalls to avoid:
- Enter into an MBO for the right reasons. If the main priority for the disposal is value then an MBO may not be the right avenue for your business to go down as internal management are unlikely to have access to the level of capital available to a potential third party purchaser.
- Ensure you have a strong and capable management team in place who understand the mechanics of the business and are flexible to change.
- Ensure that new roles are clearly defined and communicate with your staff – do not let rumours inform them for you.
- Consider other possible options. An MBO may not be the best option for your company. Ensure that you and your team consider all other options to avoid a potential re-trading occurring later on.
More often than not the benefits associated with an MBO will outweigh the risks involved – provided that the deal is well structured enough to avoid falling into any pitfalls. A strong and capable management team is essential for an MBO to be a success but it is also important to have the right team of legal and financial professionals on hand from the start to ensure that the deal is watertight. MBO’s have been gathering in popularity for many years, but they will not always be the right sort of transaction for everyone so it’s important to do your homework and only enter into an MBO if it’s the right fit for the success of the company.