Management Buyout (MBO) involves the acquisition of a company by its existing management team. This process is diverse and involves several critical steps that need to be carefully planned and executed. In this blog you will find the key steps to take and considerations to be made during the processes of a Management Buyout.  

Engaging the current owner(s)

Initial conversations with the current owner should determine their willingness to sell. These discussions are sensitive and should be approached carefully, often with the help of a professional advisor.

Timing the proposal

Identifying the right time for an MBO is crucial. For example, proposing an MBO when the current owner is nearing retirement can be ideal but often requires proper succession planning for both parties to benefit.

Credibility building

The management team needs to establish themselves as reliable and capable future owners in the eyes of the current owner and external stakeholders. If the management buyout is part externally funded, a lender will need to get comfortable with the strength of the management as they are ultimately backing their ability to run a successful company without the current owners.  

Funding ‍

The majority of a funding in a management buyout will come from;  

1. Banks and other lenders – amount and quantum can vary dependent on size of the business and its operations.

2. Equity Investors – the company will usually have to demonstrate strong growth potential to attract this type of investment.

3. Contribution from the management team (often x1 salary). Often described as ‘hurt money’, this shows commitment from the management team.

4. Deferred consideration - often bridges the valuation gap. This is essentially a loan paid to the business owners over time.

Advantages of a Management Buyout

1. Increased opportunity for management: managers gain the potential for increased earnings and wealth and can steer the business towards long-term success with their own ideas.

2. Certainty of a successful exit: selling to internal managers reduces complications and increases the likelihood of a smooth transaction.

3. The business's legacy and operational continuity are maintained, as there are fewer disruptions compared to a trade sale.

4. A strong management team will understand the business thoroughly, ensuring stability and continued performance. Dependent on the current responsibilities and involvement of the management team, and how the transaction will be funded, there may be a reduced need for detailed due diligence process (compared to a trade sale).

5. Reduced risk of information leak! The existing owner doesn’t need to market the business for sale, simplifying the process and eliminating the risk of commercially sensitive information being shared to outside third-party buyers.  

Disadvantages of a Management Buyout

1. The business often takes on debt to finance the buyout, significantly impacting future cash flow. If the business has never had to previously operate with a considerably amount of debt, the future reporting requirements (lenders will often want) can come as a shock. Cashflow management becomes key.

2. Market value, not strategic value! While the market value is typically guaranteed for an MBO, it might be lower than what a strategic trade buyer would offer.

3. Funding challenges as management teams often lack the necessary personal funds to contribute to the transaction. Appetite to lend from external lenders can often depend on the size of the business and assets within the business that can be lent against or re-financed.  

A Management Buyout (MBO) can indeed be a highly effective solution for business succession if it is carefully planned and executed. At Gravitate Corporate Finance, we understand that the success of an MBO hinges on aligning the objectives of the current business owners with the aspirations and capabilities of the senior management team. If there is a mismatch, alternative exit routes should be considered.  

For more information on a MBO or to design an exit strategy tailored to your goals click here!