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07/10/2014

Have you thought about management buy-outs?

A common type of succession deal is the management buy-out (MBO), allowing a management team or employees to purchase a business from its owners.

MBO teams can be under the impression that a buyout is not possible because collectively the team members do not have sufficient funds to meet the financial requirements. However this is quite a common misconception.

Deals are usually structured in a way where the MBO team is only required to cover a relatively small portion of the overall , with third party financial institutions such as banks or investors like Finance Wales providing the vast majority of finance required.

As a succession option MBOs can provide a number of benefits for not just the MBO team involved but also for the vendor and the business itself.

Benefits for the MBO team

  • Job security – management teams or employees effectively become their own boss.
  • Motivation - motivational levels can often increase as a result of MBOs due to a sense of loyalty and belonging.
  • Return on investment – the MBO team can invest a relatively small amount of capital into an MBO through the backing of the right investors. Once these debts have been repaid the MBO team stands to gain significant equity for a low price.

Benefits for the vendor

  • Leaving a legacy – An MBO team should understand the values and culture of the vendor’s business more than external buyers.
  • Sensible valuation – A valuation through an MBO is more likely to be accurate due to better knowledge of the business’ profitability, avoiding any revaluations later on.
  • Avoids speaking to competitors - vendors may be nervous about approaching competitors and disclosing sensitive information in regards to a potential sale.

Benefits for the business

  • Less disruption – as the takeover is internal there is less chance of any serious disruption to the business.
  • Speed of completion – MBOs tend to be completed more swiftly, allowing the business to move on more quickly.
  • Greater chance of success – the MBO team will have direct experience of the business they are acquiring as well as the market they operate in, minimising any surprises.

Getting investment

Getting investment for an MBO is perhaps not as difficult as many would think. However investors will always assess the conditions around any potential MBO to see if the key attributes for success are there. 

The vendor

  • Are they co-operative?
  • Do they have sensible expectations?
  • Have they stepped back from the day-to-day running of the business yet?
  • Do they have a clear exit plan?

The buyers

  • Is the management team sufficiently experienced?
  • Do they have the enthusiasm and drive needed to push the deal through?
  • Do they have a clear business plan post MBO?
  • Are they willing to invest their own money into the MBO?

The business

  • Is there profitable and consistent cash generation?
  • Is there low (or no) debt?
  • Is there a strong middle management?
  • Does the business have robust internal systems?

A successful MBO can be life changing for all those involved, but it requires serious commitment and a great deal of preparation.

What next?

If the owner of the business you work for is thinking about retirement or wants to sell the company, contact Finance Wales and speak to one of our investment experts today to assess your true MBO potential.