What is a Management Buy-Out (MBO)?
An MBO happens when an existing management team purchases all or part of the company they work for. MBOs are usually facilitated using external financing and most commonly occur when the company owners want to exit the business or when the company is struggling to grow and the management team believe they can take the business forward into a new chapter.
What is the difference between an MBO and an MBI (Management Buy-In)?
Whilst an MBO is a purchase by the firm’s existing management team, an MBI occurs when an external manager, or group of managers, purchase a controlling ownership stake in the company and subsequently become the new management team.
What are some of the advantages of an MBO?
- The process of the sale is often faster than what can be achieved with an outside buyer, particularly because minimal due diligence is required in an MBO. Finding a trade buyer can be an extremely time-consuming and expensive task.
- Confidentiality can be upheld. Information can remain inside the business when negotiating with the existing management team which means that customers and clients are less likely to have concerns regarding sensitive information being shared.
- Owners can leave the business in “safe hands” which is particularly comforting when there is an emotional connection involved.
- The management team are already familiar with the business and as a result, companies purchased through an MBO generally have a higher chance of ongoing success. Existing relationships with clients and suppliers can also be maintained which can be extremely beneficial.
- The current staff and clients are more likely to feel reassured in the future of the business, meaning that profitability is less likely to be affected.
What are some of the disadvantages of an MBO?
- MBOs most often require external funding and because the deal only involves internal personnel, financial institutions such as banks or investment firms are often more wary when considering whether to issue funds. This means that raising the money to facilitate the buy-out can be challenging and can take longer for owners to receive the full amount of funds.
- The relationship between the owner/s of the business and the management team is likely to change. If the deal fails to go to plan, there is a risk that this relationship could be severely damaged and may have detrimental impacts on the business itself.
- Managing the handover from the current owner to the new owner/s is crucial for maintaining optimal operations. Important information, such as existing and prospective contacts, must be carefully transferred to minimise the likelihood of anything getting lost in the transition. A third-party professional is often beneficial to support this.
- The management team are unlikely to have experience in owning a business and to transition into this new role, with everything it encompasses, can be challenging. For this reason, it is common for managers to continue to take guidance from the previous owners, but this may not always be possible.
- It has been known for the management team to take steps to reduce the company’s profitability leading up to an MBO with the aim of reducing the purchasing price for themselves. It is therefore important that the existing owners continue to keep a close eye on the business ahead of their departure.
Important things to consider in an MBO:
- How credible and committed are the management team and do they have the necessary skills and expertise to take the business forward?
- How will the MBO be funded and is the type of finance agreed on by all parties?
- When looking into engaging advisors to assist with the process, it is important not to get enticed by low fee estimates as the cheapest option very rarely means the best.
- Who will be the first directors of the company under the new ownership?
- Will all members of the MBO team hold shares in the company, and what will they be required to personally contribute?
- Will there be a shareholder’s agreement in place?
MBO support at HB&O
HB&O Corporate Finance have been assisting clients with MBOs for a number of years. As a result of our extensive experience, we are able to anticipate certain difficulties arising and can advise on how best to deal with these ahead of time. Choosing the right advisor to guide you through the MBO process is an extremely important decision to make; the person or team you appoint should be able to ensure that your selling strategy is correct, be able to provide you with an accurate business valuation, assist with the transitional period and they should be specialists in creating an effective tax strategy which ensures that you pay the least amount of tax possible.
If you would like to find out more about the support we offer at HB&O, please don’t hesitate to get in touch with the corporate finance team.
Email: [email protected]
Phone: 02476 306029
