Management Buyout (MBO)
What is a Management Buyout?
A Management Buyout (MBO) is a common and popular exit strategy that allows shareholders to sell the business to its existing management team. Often used when an owner is looking to retire, an MBO enables a smooth transition by handing the business over to those who already know and understand it. It can also be an effective way for companies to sell off specific divisions or subsidiaries to internal teams.
Management Buyouts: What's it all about?
Most owners are emotionally as well as financially invested in the business, especially if they’ve grown it organically themselves from scratch. By selling it to the MBO team, vendors have the satisfaction of seeing it in the hands of people who are similarly invested; people who share their business values, aims and objectives.
Transactions can often be completed more quickly with an MBO as there’s no need to put the business on the open market – there’s a readymade, known, and trusted buyer. But, before going down the MBO route, there are a number of key points that the seller should consider.
Primarily, is the current management team capable of taking on all the responsibilities that come with owning as well as running a company? Are they ready to take the big step up from manager to owner – and do they have the money or access to funding needed to go ahead with the acquisition if it’s not wholly financed by the business’s profits?
There is no point in selling to a management team that is not yet ready, unless the vendors are prepared to stay involved in the business for quite a while longer. If the owner is keen to retire within let’s say, the next 12 months and the team isn’t fully prepared to take it on, then selling via an MBO makes little sense.
It can also be an effective way for companies to sell off specific divisions or subsidiaries to internal teams.
IMPORTANT QUESTIONS SELLERS MUST ASK
WHEN THINKING ABOUT AN MBO
Often, an MBO can be enhanced and strengthened by bringing in one or two senior external people to supplement the existing management team. This move, sometimes called a management buy-in or partial buy-in, allows for the introduction of fresh ideas and leadership expertise while retaining the current team's knowledge, experience and familiarity with the business
Since the transactions are often financed from the profits of the business, it's essential that the price set is reasonable. Firstly, owners need to determine what the business is worth by considering its profits, regular income, market forecasts, sector trends and EBITDA, earnings before interest, taxes, depreciation and amortisation
If the cost of the transaction is to be met from future profits, you'll need to be fairly sure that the company will thrive under the new management team. If they need to take out a loan to finance the deal, then this might harm future cash flow and prevent the business from growing. Also, if the MBO team decides to use personal assets such as equity in their own homes as collateral, this could be at risk if the business struggles
It's not a condition of an MBO that managers do this, but many vendors feel that it is important for the buyout team to have some 'skin in the game' by committing some of their own money. That way managers have a reasonable sum at stake that's dependent on how well the company performs, motivating and incentivising them to succeed
Management Buyouts:
What’s it all about?
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