What is a Management Buyout (MBO)?
Management Buyouts are a popular exit strategy for owners of small businesses. A Management Buyout (MBO) is when managers of a company invest their own money, often along with financing from an outside investor, and buy the firm from the current owners. Management Buyouts can be risky, but they can also provide an attractive exit strategy for a business owner. They are beneficial because they allow the founders to cash out whilst often retaining some control of their business. A management buyout may be right for you if you’re thinking about selling your business one or if you’re ready to transition out of day-to-day operations but aren’t quite ready to retire yet. Here are some pros and cons of management buyouts that every business owner should consider before making this big decision.
The Pros of a Management Buyout
- Business is sold to the existing top team which should enable it to thrive.
- Easier for you to maintain some shareholding and even partial control and participate in a 'second exit'.
- A good mechanism to bring in 3rd party funding to facilitate your exit (note: also a potential con).
- Often easier to agree on the business value as both parties know each other and the potential of the business.
- Greater confidentiality as information not being passed to a third party buyer or competitor.
- Faster process and more control for the Seller.
The Cons of a Management Buyout
- Exit value could be lower if not benchmarking the sale with a third party which may benefit from economies of scale.
- MBO team may take on too much personal debt which may reduce their appetite to risk.
- If a 3rd party funder is involved this could saddle the business with too much debt and change focus to short term repayment of funder's debt - as opposed to customer service and long term growth.
- MBO team may not have the entrepreneurial spirit to grow the business.
What Are the Steps in a Management Buyout?
Before you start talking to your top team about a Management Buyout, you should have a good idea of how much your company is worth. You can get an appraisal from a consultant like Stepchange Business Growth who will analyse all aspects of your business and compare it to similar businesses which have been sold.
You need to decide whether the timing is right for you (the deal will take up to 6 months to complete) and whether you want a full or partial exit.
After this you should think about who you would like on the MBO team, what share of the company each person should get, the cost of each share and whether any third party finance will be required.
It's imperative that you carry out the above steps before discussing a potential MBO with any members of your top team as the last thing you want to do is to raise expectations which don't come to fruition.
Summing up
A Management Buyout is an option that allows you to retain control of your business whilst derisking by taking 'cash off the table'. It can be set up in a manner where you’ll be able to continue running things the way you always have, which may be important if you’re worried about losing control of your business during a sale. However, it's possible that you might not achieve the maximum value that a trade sale would bring and if you wish to significantly step away from the business then the future growth could be at risk.
If you are interested in an MBO we'd love to hear from you so please contact us.