A management buyout (MBO) can be a great solution for business owners looking to retire or exit where there is no clear third party buyer - this is often the case for smaller businesses.
An MBO can facilitate a shareholder exit or partial exit of the business while handing over control to an experienced management team.
What is an MBO?
A management buyout is a process where the existing management team purchases the shares of the current shareholders. This transaction grants them complete control and ownership of the business, effectively making them the new owners and decision-makers.
The exiting owners often stay involved in some capacity, phasing out over time, which provides a smoother transition and continuity, de-risking a potential “hard landing”.
There are a few key pre-requisites for an MBO which should be assessed at the outset of any MBO process:
- Is there a capable management team in the business who see the potential in the business and have an appetite to take control and ownership?
- Are value expectations aligned between the vendor(s) and the MBO team, at least enough to make it likely a transaction value can be negotiated?
- Is the vendor(s) willing to accept deferred consideration for some or all the sales price? This will often be required to make an MBO viable.
Benefits of an MBO
A management buyout can be a strategic move that offers a range of advantages for businesses and their stakeholders. The benefits of an MBO are:
- It can facilitate the sale of a business where there is little 3rd party interest in buying the business.
- It can allow a phased exit for the seller and support for the incoming MBO team in the early stages.
- Smoother transition of ownership and continuity for employees, customers, and other stakeholders.
- The completion process for an MBO will often be faster than a third party sales process.
- The need to disclose commercially sensitive information to people outside the business is greatly reduced.
- The financial structure of the transaction can be flexible and mix vendor financing and external financing.
Potential issues
Considering a management buyout comes with its set of challenges and potential stumbling blocks:
- It may be difficult for parties to agree on value as it is a closed process with no underbidders.
- It may be difficult for the MBO team to raise sufficient funding for the element of consideration to be paid on day one.
- The vendor may be unwilling to accept the level of deferred consideration or vendor financing required by the MBO team.
- If negotiations break down, it can damage the relationships within the business and may harm the business overall, potentially in the short term to medium term.
- If the MBO team encounter difficulties running the business or breach covenants of the MBO agreement, the vendor may ultimately be required to step back into the business to protect the value yet to be extracted.
Conclusion
A successful MBO not only offers an exit strategy for retiring business owners but also serves as an opportunity for the next generation of managers to take the helm. It ensures a seamless transition of ownership, which creates stability and continuity for the dedicated employees and loyal customers of the business. This can contribute to the long-term sustainability and growth of the company.
An MBO can be structured with a blend of external debt (or equity) and vendor finance, allowing the vendor to receive a day one payment and the remaining amount being paid in the years following the transaction.
The next step
If you are considering a management buyout in your business, it essential to get the right advice, and UHY can assist you in negotiating and structuring a deal that works for you. For more information, please get in touch with Michael Fitch at m.fitch@uhy-uk.com or your usual UHY adviser.
