An Introduction to Management Buy-Outs
Particularly in an improving economy, Management Buy-Outs (MBO’s) can be an attractive option for vendors, and a credible alternative to the classic trade sale.
Contrary to popular belief, there are good levels of funding in the market for MBO’s, but they must be carried out fully and properly just like any other sale. MBO’s can be a good option because:
• MBO teams know and understand the business.
• Existing management can often see new opportunities for growth, sometimes having been held back by “conservative” vendors preparing for retirement.
• MBO teams are usually motivated by share ownership and personal wealth creation.
It is often perceived that MBO’s are more difficult for a vendor than a trade sale, but in fact several factors favour an MBO, in particular:
• Ease and speed – the management already know the business so there’s no need to dress it up for sale in any way.
• Confidentiality – the internal nature of an MBO reduces the likelihood of sensitive information passing outside the business.
• Comfort – very often a vendor will prefer to see the business they have founded and grown passed to known safe hands.
• Flexibility – an increased level of knowledge and trust allows greater flexibility in the deal structure for both parties.
There are of course several key points which will govern the success of an MBO, foremost amongst them being:
• Can the management team “step up”? Passion for the venture is essential and management must be totally convinced by the opportunity, which should be bought into on the basis of merit, not friendship.
• A strong balanced and committed team is absolutely essential, not least to convince funders that they can successfully take over the business.
• Strategy and growth potential are key, funders will need to be assured of growth potential, and higher potential returns to reflect the higher risk inherent in an MBO.
• There is also an illusion that management need to raise huge amounts of personal capital, which is not so. Certainly a meaningful commitment is always required but proportionately management generally contribute a relatively small amount of the total buy-out price.
So, MBO’s can be an attractive option for a vendor but they must always be carefully planned and prepared. An MBO should be seen as one option but not at the expense of reality. Frank and open discussions are essential right from the outset to establish the expectations of both parties, and a realistic view on value will be critical.
Perhaps more so than other exit options, proper professional advice for both sides will be invaluable.
31 March 2017