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
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
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
- 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
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.
- Are they co-operative?
- Do they have sensible
- Have they stepped back from
the day-to-day running of the business yet?
- Do they have a clear exit
- Is the management team
- 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?
- Is there profitable and
consistent cash generation?
- Is there low (or no)
- Is there a strong middle
- Does the business have robust
A successful MBO can be life changing for all
those involved, but it requires serious commitment and a great deal
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.