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A business owner has a number of options if they are looking to move on. One of these is to sell the company to the management team.
A sale to management could be preferred for a number of reasons. Our guide gives you a rundown of all you need to know about management buyouts, including a step-by-step guide.
What is a Management Buyout?
A Management buyout or MBO, is where the management team of a company, combine their funds to buy the company from its owner/owners. Often the management team adds their own funds to loans or money from external investors to achieve the buyout. See below for more details on how an MBO is funded.
What are the benefits of a Management Buyout?
There are several benefits to a Management Buyout. These can include the following:
• Existing clients may be more likely to stay as they have an established relationship with the management team;
• Clients are also likely to feel reassured that the way in which they’ve conducted business with the company up to now, will not change;
• The management team already know the business and so the chances of success may be higher for them than for other buyers;
• Employees may be more likely to stay as they feel reassured that not much will change under the ownership of the management team;
• The confidentiality of vendor contracts or internal changes will be maintained;
• Information will not be leaked to competitors;
• Any due diligence, required by shareholders, or funders, can be done quickly.
What are the challenges or risks of a Management Buyout?
Although there are many benefits, there are also challenges and potential pitfalls to look out for. These can include the following:
• The management team will change from being employees to being entrepreneurs. This requires a mindset shift that, for some, can be challenging;
• Any gaps between different members of the management team in terms of skills, experience, knowledge and credibility must be carefully managed or plugged to ensure funders or shareholders have the confidence that the team can drive the company forward;
• Sometimes there can be a mindset or actual dependency on the current owners;
• Members of the management team may be approaching retirement.
How is a Management Buyout funded?
• Management contribution - In the first instance, the management team contributes their own personal funds. An amount of one year’s salary is a normal amount to give. This is not just to buy the company but also to demonstrate commitment;
• Asset Finance - This is a loan given against the value of non-physical assets. Typically, these will be company stocks, property or debtors;
• Bank Loan - If the company is profitable, it is possible to obtain a bank loan for repayment over several years;
• Private Equity - This is normally done through a private equity firm. The firm collects money from wealthy individuals and institutions and invests it in smaller companies which are not yet publicly listed. Investing in a management buyout can yield good returns for investors;
• Vendor Loan Notes - This is where the current owners agree to leave some of their funds within the company, as a loan, and get the money paid back, with interest, over several years.
What makes a Management Buyout successful?
An MBO is more likely to be successful if the company is a strong one with a profitable track record. The future prospects for the company should also be good, especially if the future profits are expected to pay off loans secured to buy the company. The management team should be committed with a similarly high level of individual skill, knowledge, experience and credibility. The vendor should set a realistic price and be open to discussing a management buyout.
What are the steps of a Management Buyout?
- Step 1 - The vendor and the management team agree on a price. This often includes an independent evaluation of the company’s worth;
- Step 2 - The management team calculates how much they can personally invest;
- Step 3 - Detailed analysis into the company’s current funds and future profitability is done. This is in order to calculate how much can be borrowed and paid back by the company coffers. This is also to work out how attractive the company is as an investment opportunity and what kind of yields it will offer investors;
- Step 4 - Funders are approached.
How long does a Management buyout take?
Six months is a normal timeframe for a management buyout. Therefore, the management team must be able to commit to this timeframe. It may be challenging as it will require lots of extra work and normal business must still continue during this process.
A Management buyout can be an attractive option for a number of reasons, but there can also be a degree of complexity so it is advisable to seek professional advice.