A management buyout (MBO) is a transaction in which a company’s management team purchases the assets and operations of the company they manage. The team generally uses their own funds, along with financing from banks or investors, to acquire the company.
Are you thinking of proceeding with a management buyout? Do you understand the process and the issues that may arise?
Jo Haigh, Chairman and Founder of fds, shares an overview of the complex nature of the MBO process.
The Considerations of a Management Buyout
Are management buyouts complicated? Yes, they can be, but they can be an extremely effective exit route for any shareholder or vendor.
If you are a company director, your duty under law is to always put the company first. This means that when you buy a business that you are already a director of, you have an immediate conflict. Taking the business’s best interest and the current vendor into consideration, it would seem appropriate that the highest possible value should be secured for the business. However, it is important to keep in mind that the investment will be coming from either your own funds or borrowed capital.
From a business owner’s perspective, a management buyout offers the advantage of continuity and stability, as the existing management team is already familiar with the company’s operations, culture, employees and strategic direction. This can lead to a smoother transition and preserve the owner’s legacy. It will also diminish many concerns that the current team may have regarding the vendor’s personal business exit strategy. However, MBOs can also involve significant financing risks, as the management team may struggle to secure the necessary funds. Additionally, negotiations can sometimes strain relationships between the owner and management team. This is especially prevalent in cases where there are disagreements on valuation or terms.
Preparing Your Business for an MBO
Juggling your day job and organising a management buyout for both the vendor and management team will make for a very busy and challenging period of time. This is why enlisting the advice of experts in this field is beneficial for a smoother and less stressful process.
If you are seriously interested in exploring an MBO, be sure to approach the process with your eyes wide open. Ensure that you are prepared for the differences between simply working in a business and owning a business. Do your research and engage with advisors who can guide you to get the most out of the process.
While MBOs can ensure a seamless transition, they require careful planning and clear communication to mitigate potential drawbacks.
If you are concerned about your lack of funds, fds has firsthand experience in managing deals where the management team have limited capital. Still, we have secured the larger part of the equity for them due to the way the deal is structured with the investors. In recent years, more and more vendors are prepared to help a management team facilitate a deal. This is especially in cases where they are unable to find a trade buyer.
Interested in learning more about the management buyout process? To learn how we can support your company’s succession planning journey, click here.