Is an MBO right for your business?

July 5, 2024

Dan Wright

Corporate Finance Director


Is an MBO right for your business?

Before you are ready to exit your business, it is important to explore the exit options available to you.

It’s worth thinking in depth about what you need from your exit in terms of your legacy, the future of the business, timing, money and any ongoing interest in the business you may want to keep.

For many business owners a Management Buyout (MBO) can be the right exit strategy. However, an MBO takes expertise and planning. You need to put the foundations in place long before you want the MBO to happen.

In this blog, we look at the advantages and disadvantages of an MBO and key considerations for a successful MBO.

What is an MBO?

A Management Buyout (MBO) involves some, or all, of your management team acquiring part, or all, of the business.

A management buyout process often involves the existing management team purchasing the shares from the current stakeholders. When the transaction completes, the ownership of the business transfers to the management team involved in the transaction.

A management buyout can sometimes be an ideal solution for the exiting business owner, especially if the management team are dealing with most of the day-to-day running of the business. You know and trust them; they know the company and can continue your legacy. But an MBO can have its own pitfalls.

So, how do you know that an MBO is right for you and the future of your business?

What is the difference between a management buy-in and management buyout?

A management buyout (MBO) is when your company is purchased by its existing management team. Whereas a management buy-in (MBI) is when you sell your company to an incoming team. The advantages and disadvantage of each type of these options are different.

A management buyout team will have extensive experience of the company working alongside you before you exit the business. A management buy-in team will often have sector experience but little or no experience of your specific company.

How to decide if an MBO fits your business exit plans

Before considering a management buyout, you should ask yourself these questions:

  1. Does the company have a strong track record of profits?
  2. Will an MBO achieve a realistic price for your business?
  3. Does your own management team have the right mix of skills and strengths to take the company forward?
  4. Do they have the drive and the desire to take on the responsibilities of ownership?
  5. If your incumbent management team don’t have the right skills, do you have time to build a management team with the new skills needed to take the business forward?
  6. Is your management team unified and do their personal interests align?
  7. Have you researched the feasibility of the transaction?
  8. Does your management team have the ability to raise the finance needed?
  9. If not, would you be happy to receive consideration over a longer period of time?
  10. Are your senior management team already heavily involved in all the day-to-day roles required to run the company?
  11. Can the team manage not just operations but finance as well?
  12. Can they manage difficult situations where sales may fall, timings may be affected and cashflow becomes tight?
  13. Do they have the vision and strategic skills to take the business forward?
  14. Do you know what you want from your own role i.e. do you want to retain some involvement or leave immediately?

Advantages of an MBO

  • The likelihood of a successful completion can be far higher than in trade sales.
  • Initial discussions around the possibility of an MBO can incentivise management and provide fresh impetus into the business.
  • It can provide continuity for both staff and customers.
  • Management information won’t be disclosed to external parties and can remain confidential.
  • Often the negotiations on the value of the business can be easier due to the ‘friendly’ nature of discussions.
  • The sale process may be faster and there can often be more flexibility in the structure of the deal.
  • You may be able to plan your exit over several phases allowing you to remain in situ and have more time to develop the team until your final exit.
  • You may be able to have more control compared to a trade sale and retain a minority stake in the company.
  • It may be a smoother transition as the main management don’t dramatically change, and employees may accept them more readily as the new owners.

Disadvantages of an MBO

  • The management team often have insufficient personal wealth to part fund the purchase.
  • The management team may struggle to raise sufficient external funding for the deal so funding may well need to come from inside the business. Where the right criteria are present, an MBO may well be funded by Private Equity.
  • Any lack of funding often means a higher level of deferred consideration is required, so sale proceeds will be spread over time increasing the risk of non-payment or other default.
  • The valuation may be lower than a trade sale as the management team won’t benefit from synergies and economies of scale that a trade buyer may.
  • The management team may struggle with the range of different skills required to lead and run the whole business. They may have great individual skills but may lack the requisite entrepreneurial flair needed to run a business.
  • The company’s management are often busy in their day-to-day roles and may lack time during the deal process, this means they will depend more on professional advice to take as much strain as possible out of the transaction process as possible.
  • If you remain involved, it may be difficult to find the right balance between allowing the new owners take the reins and you letting go.
  • If an MBO does not proceed, it may damage your relationship with your management team if not handled correctly, which may have a detrimental effect on the future of the business.
  • The management team may need to choose one person to lead the MBO. Multiple views on how to take the business forward can sometimes lead to problems. This highlights the importance of a well thought out shareholders agreement.

Funding an MBO

One of the first questions asked of any MBO team is how much money they can contribute to the purchase price themselves. In terms of affecting the deal, the larger the amount contributed by the MBO team, the better chances of raising external finance.

Ensuring the company’s management team has the finance available for the transaction is a key consideration but this must be balanced against putting too much financial strain on the business to avoid being unable to invest for growth. Funding will often be needed via external lenders or a private equity firm.

Third-party lenders may request some form of deferred payment to ensure the owner is committed to the transition. In recent years, we’ve seen an increase in private equity firms, high street banks, and alternative lenders funding MBOs.

More often than not, with an MBO, deferred consideration is involved. This is effectively where the current owner acts as a funder and takes on an element of risk. Where consideration is deferred, the buyer obtains the shares or business at completion but pays part of the purchase price at a later date or dates. The deferred consideration may be a fixed amount, or it may be linked to the future performance of the business – this is often referred to as an ‘earn out’.

What is a leverage management buyout?

A leveraged management buyout is similar to an MBO. Leveraged management buyouts involve the current team buying all or part of the business from the current owners. However, the company’s existing assets are sold or pledged as collateral to raise some or all the purchase funds. The buyout team leverages the value of assets such as property, plant, or machinery, to borrow money to buy the business from the outgoing owner.

The management buyout process

A typical MBO process may look like this:

  1. Feasibility and viability assessment including initial funding research.
  2. Appointment of professional advisors.
  3. Tax planning.
  4. Negotiate and agree a deal.
  5. Draft and sign heads of agreement.
  6. Prepare a business plan and projections for funding.
  7. Approach funders, compare funding offers, negotiate and select funders.
  8. Undertake due diligence.
  9. Legal process.
  10. Covenants.
  11. Deal completion.

The MBO team

The MBO team will be taking on responsibility for the entire business including areas such as operations, technical, production, marketing, sales, finance, administration and also roles where they may not have been involved in previously such as the role that you undertake as the MD/CEO, i.e. a strategic role.

If your current team lack some of these skills or you don’t have these roles in place, then as part of your planning process you may need to recruit an external candidate. Alternatively, some of the roles could be filled by a non-executive director (such as a finance director or chief finance officer being fulfilled by your current accountant). If a private equity backer is involved, they will normally add a non-executive (part time) director to the board to look after their financial interests and provide some prior experience.

Some MBOs (although not many) don’t include all members of the current management team. Some individuals in the team may not want to be involved or take on the financial risk that running a business can be.

Is a management buyout the right option for you?

A management buyout is a significant undertaking for both you the owner and your management team. You have to carefully manage the process to ensure that no deterioration of the day-to-day running of the business occurs during the transaction. All parties involved need to be prepared for a what can be a gruelling and complex process.

An MBO may be the right option for you and your business if you’ve set a realistic price for your business, the existing team are strong and consists of skilled individuals with objectives aligned for the future success of the business and that can raise the necessary funding to undertake the deal.

Your exit strategy should achieve a smooth exit for you, your family, your management team and your employees which minimises the impact on your trade, maximises shareholder value and allows you to create a tax efficient disposal. If you believe an MBO achieves this, then it is worth undertaking an MBO.

How we can help

After years of hard work and building your business, handing over the reins and leaving your business can be a daunting stage to go through. Whether you’re selling, passing on to family or considering an MBO, you need to make your plans in plenty of time.

Beware of trying to handle the entire process yourself. Exiting your business in the best way for you and your business and maximising your return on exit can be a long and distracting process. If you try and do it yourself, the time and focus required could have a negative impact on your business performance and even your mental and physical wellbeing.

The Barnes Roffe Corporate Finance team can take the heavy lifting off you from the beginning of the process. By utilising our team’s experience and resource, you can continue to focus on what you are good at – running a successful business. We have a dedicated team that focuses purely on these types of transactions, which are often once in a lifetime for the individuals involves.

The exit process tends to be time consuming and stressful at times. Having the experience of a specialist can help you navigate the peaks and troughs of an exit successfully.

Barnes Roffe support business owners from all sectors throughout their exit planning and sale process including: 

If you would like more help and advice with planning your exit strategy, then contact us today.

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