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What is a Management Buy-Out and is it a Good Idea?

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A management buy-out (MBO) is where the core management team of a company come together to acquire an equity stake in the company. Depending on the circumstances of the transaction, an MBO could result in the management team taking 100% of the shares in the company.  The size of the buyout can vary depending on the size and complexity of the business and may occur in companies of any industry.

Here, Greenaway Scott looks at the rationale behind management buy outs and the advantages of structuring a deal in this way.

An MBO is an attractive prospect to both the selling shareholders and the management team, offering the smooth continuation of a business in which the ownership is transferred to those individuals who are already familiar with the inner workings of the company. The motivation behind a buyout can often be the same as that of any sale in that the seller may be looking to retire or move on to different business, however when doing so may also want to provide the current management team with an opportunity to take part in the future growth of the business to which they are already interested in. It is important to recognise that the key to a successful buy-out is the owner entering in to the deal for the right reasons. If the value and the price are the seller’s priorities then the buy-out may not be the most favourable way to sell. If this isn’t the primary motivation behind the proposed MBO, then a buy-out can be advantageous for both parties.

For the operations of the company during the sale process, an MBO can offer a smooth transition of ownership in that the management team will often remain the same and in turn this can mean little change to the actual day to day running of the business. Any fear or doubt coming from the existing employees and customers can be reduced by a reassurance that business will continue to run as usual which is not always the case in a sale to a third party where the management team may change.

An MBO also represents a solution to those business owners who don’t have a succession plan in place and saves the seller having to invest a significant amount of time, money and effort into marketing their business in the hope to finding the right buyer. With a buy-out, the buyers are ready and waiting which can mean a quicker, cheaper and smoother sale to a buyer who already has an intimate knowledge of the business meaning far less due diligence is required. Selling a company to the management team also decreases the risk of exposing confidential and sensitive information to a third party buyer. As the owner of a successful business, ensuring confidentiality around the sale could be a top priority and the risk of divulging this information can be unnerving. The MBO is an opportunity to maintain the continuance of confidence in the business whilst following through with a sale. On top of this, the lengthy due diligence process and the task of compiling hundreds of documents can seem daunting for any owner.

A management team will often represent sophisticated buyers who are well educated on the operations of the business. This familiarity can significantly reduce the timeline of the sale process and can also reduce the risk of not closing the deal compared with a third party buyer who is only now looking at the ins and outs of the business.  Structuring a deal as an MBO will often reduce the risk that a third party buyer would encounter when looking to purchase a company with little knowledge. With an MBO there isn’t usually a the need to carry out a lengthy due diligence exercise on the company as the management team should already know what they are buying and so there should be less chance of unwanted surprises arising post completion. The management team should feel confident and comfortable with the fact that they have been running the business already and therefore post completion, there will likely be little or few changes to be made and the business can continue to run successfully.

The steady rise in management buy-out deals over the past year is evidence of the opportunity that they can bring to both the owner and the management team.  The number of deals rose 20% from 76 deals in 2016 to 91 deals in 2017 and in this same period the value of the MBO deals saw a 4% increase. At Greenaway Scott, we have also seen this increase with the value of MBO deals in which we have acted on in 2018 to date reaching close to £16 million.

The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our corporate team would be more than happy to assist you. Please contact us at [email protected]  or call us on 029 2009 5500 to speak to one of our team.