Management buy-out (MBO) can be a complex yet exciting transaction which needs professional project management to ensure that it gets completed smoothly, without any negative effect on the business.
HOW HAS THE COVID PANDEMIC IMPACTED MANAGEMENT BUY-OUTS?
The impact of COVID-19 has seen a reduction in the number of MBOs taking place. However, equity and debt funders are awash with cash from prior fundraises and their appetite to invest remains very strong, meaning it’s a perfect time for an MBO team to source funding.
WHAT IS A MANAGEMENT BUY-OUT (MBO)
An MBO is a change of corporate ownership where the company’s current managers acquire all or a large part of the company’s shareholding from the current owner, whether a larger corporate group or private shareholder(s).
WHAT TRIGGERS A MANAGEMENT BUY-OUT?
MBO’s are often triggered when the founder of a business wants to retire. It is an attractive option when an established business is now being run day-to-day by a management team and the owner(s) are relatively hands off and want to exit the business to fully retire. MBOs also occur when a parent company wants to dispose of part of its business. Rather than finding an external buyer, selling to the incumbent management team can be a better way of disposing of the business unit and freeing up the capital.
WHAT ARE THE BENEFITS OF A MANAGEMENT BUY-OUT
For an exiting owner, an MBO will offer an attractive succession plan, as there will be continuity of management and no requirement to disclose confidential information to outside parties. An MBO is an attractive option for the management team acquiring the business where there is a track record of profitability and a strong, motivated management team with a clear vision of the future direction for the business.
BENEFITS OF MANAGEMENT BUY-OUTS FOR THE MANAGEMENT TEAM
- They have a good understanding of the business, including customers and staff.
- There is limited risk as they know the business challenges ahead and should already be planning for those and taking them into account with the valuation.
- An MBO is seen as a good investment because of the stability it affords the business.
- There is the potential for high returns as the opportunities and market is known.
BENEFITS OF MANAGEMENT BUY-OUTS FOR EXISTING OWNERS
- It is typically a low risk way of selling the business.
- Information on the fact that the process is happening can be kept confidential. You do not run the risk of disclosing commercially sensitive information outside the business which could occur if you are selling to a competitor.
- The process is very controlled compared with other potential ways of disposing of a business.
- Selling to the management team secures the future for the business which is often important to founders as they have spent many years working in the business building it to where it is today. There is often a strong emotional attachment to the business and the staff for long-term founder/owners.
As with any complex transactions with potentially very high financial implications, MBO’s can be time consuming to execute. One of the issues with an MBO is that the management team typically have their time fully consumed with running the business normally. If the management team spend too much time working on the MBO, it can be at the detriment of the business’ performance. This is why typically a professional services partner will be brought in to support the management team during and immediately after the MBO. While it is tempting for some businesses to think that the amount of time and distraction will not be significant, however the potential risk to the deal and the business can be significant where insufficient professional support is obtained.
MBO’s require specialist knowledge in the structuring and financing to maximise the financial benefits and minimise potential risk factors. From the resultant tax position of the business and the individuals involved through to how money is raised in an efficient way, making a bad decision can have huge financial ramifications. A good corporate finance team with MBO experience will know of common pitfalls and will also have specialist colleagues in other areas such as tax to call upon for untypical situations.
PHASE 1 – SHAPING THE DEAL
The company that you appoint will undertake a feasibility study to analyse the existing business in order to ascertain a business valuation and a suitable deal structure for discussion.
PHASE 2 – AGREEING THE DEAL
The company you appoint will speak to and gain support from funders to agree a deal that is achievable and fundable and one that works for all parties.
PHASE 3 – SECURING FUNDING
The appointed company will assist the management team to write a business plan and produce detailed financial projections for presentation to suitable potential funders. We will also negotiate with the funders to improve the investment terms for the management team. Funding can come from a mixture of some or all of: management team putting up some hurt money; vendor deferral; bank/debt finance; private equity.
PHASE 4 – DRIVE COMPLETION
The appointed company will oversee and advise throughout the due diligence and legal process, hand holding through to the successful legal completion of the transaction.
Whether the MBO is being considered because a parent company is looking to dispose of part of its business, or it has been triggered because the key shareholder wants to retire.
IN SUMMARY WHAT IS A MANAGEMENT BUY-OUT?
For an exiting owner, an MBO will offer an attractive succession plan, as there will be continuity of management and no requirement to disclose confidential information to outside parties. An MBO is an attractive option for businesses with retiring owners, a track record of profitability and a strong, motivated management team with a clear vision of the future direction for the business.
