Management Buyouts (“MBO’s”) – 10 Initial Fundamental Questions
Previously this year we’ve looked at MBO’s from the vendor’s viewpoint, in this latest series we’re looking at MBO’s from the team’s perspective.
These questions may seem like stating the obvious, but it’s surprising how many MBO’s fail through not getting the basics right from the start. Here are 10 points to consider:
1. Will the vendor consider an MBO?
This may be the most obvious question, but approaching this in the wrong way may give a vendor cause for concern, and even to question your loyalty. You need to be fully prepared with a good plan and a credible proposal so that the vendor takes your interest seriously, and in the right way.
2. What is the vendor’s likely strategy?
Each vendor will usually have a number of options, but may be well disposed to an MBO. You need to understand if price, or some other aspect, is the main consideration, and approach discussions with a solution to that in mind.
3. Do you have the right team structure?
A properly balanced team is critical to success, from many angles. You must be able to demonstrate a blend of strategic, financial and practical skills, together with operational expertise and above all, leadership.
4. What is actually for Sale?
You need to be absolutely clear on this. Is it the business that you as managers know it, or is it a part of that whole business? Are all assets (and liabilities) included? Question specifically how much you really do know about it, is it for example sound, and able to trade successfully under an MBO team.
5. How to negotiate the best deal?
There is no prescriptive answer to this, but fundamentally you must give the vendor a solution to what he is seeking to achieve, and make it easier to do so through you as a team than any other possible option he may have. The deal must always work for both parties.
6. What Problems are likely to arise?
As managers in the business, you will know it well, and should be able to judge the strengths and weaknesses, but no business is perfect, and all have weaknesses. You must investigate thoroughly, and be fully prepared for any problematic or contentious issues.
7. What is the right funding structure?
It is always the case that the business must be able to support whatever the MBO is, and that factor drives the funding. It will almost certainly be a blend of basic lending, definitely some investment by the MBO team, and possibly external investment/equity funding.
8. What happens when the deal is agreed?
Just as with any buyer, the MBO team must carry out proper due diligence, albeit that your knowledge of the business will assist in focusing on key aspects. External assistance with that diligence is vital, as a clinical and impartial assessment of the business is vital, so that desire and emotion do not cloud judgement.
9. How will the sale be completed?
As with any deal, a full Sale and Purchase Agreement will be required, properly compiled by good lawyers, to ensure that the team’s future position is protected, and that no unforeseen circumstances can arise to adversely affect the deal that’s been agreed.
10. How do we exit the business?
This is not the strange question it may appear right at the beginning. The MBO team’s plans for the business will be crucial to both investors and funders, and to taking the business forward successfully. A full business plan should have been prepared showing how the MBO team will drive the business and at what stage, broadly, an exit is envisaged.
As can be seen from the above points, external impartial and professional expertise and help will greatly facilitate a successful MBO process, especially right at the start.
9 October 2017