Selling a Privately Owned Business – Briefing 16 – Selling to a Management Team
Our recent serios of blogs
have taken us through the key elements of the sale process, this last few blogs
look at different types of buyer.
One of the first options open
to many small business owners is to sell to the management team, though a
“management buy – out” or “MBO”. This can often have a strong emotional pull,
as well as potentially seeing an easier option than a full market sale. But
it’s surprising how many MBO’s fail through not getting the basics in place
right from the start. Here are ten key
points to consider:
- Will you consider an MBO?
Maybe a most obvious question, but approaching this wrongly may give the management team cause for concern, and even raise problems if for whatever reason the answer is “no”.
- Do the Management have the Right Team?
A properly balanced team is critical to success; management must be able to demonstrate a good blend of strategic and practical skills, financial sales and operational expertise, and above all leadership.
- What is for Sale?
You need to be absolutely clear on this. Is it the whole business as they know it? And how much do they actually know about it, and importantly, will they be able to trade successfully independently after a buy-out?
- How to Negotiate the Best Deal.
There is no prescriptive answer, individual circumstances can vary considerably. The team should have a strong leader and a clear strategy for discussions. Always remember that the deal must work both for you and the MBO team.
- What Problems are Likely to Arise?
As Managers the MBO team should know the business well, and should be able to judge which issues are likely to prove contentious. Preparation is critical, as is anticipating the team’s position.
- What is the MBO Team’s Likely Strategy?
You may well be favourably disposed to an MBO, but you should also be considering alternatives such as a trade sale. It may be that price is your key consideration, but this is not always the case, other elements can also tip the balance in an MBO team’s favour, as long as the gap in price is not too wide.
- What is the Right Funding Structure?
One of the key issues is often that the MBO team are not well funded, and so a buy – out is often a leveraged deal, so the business must be able to support the MBO to the degree required, but without placing new or undue financial strain on it. The MBO funding will almost certainly be a blend of basic lending, definitely some investment by the team itself, and possibly external investment/equity funding.
- What Happens Once the Deal is Agreed?
Just as with any buyer, the MBO team must carry out proper due diligence, albeit that their 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.
- How will the Sale be Completed?
A full Sale and Purchase Agreement will be required, as with any deal and 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.
- How do you Exit the Business?
This is not the strange question it may appear. 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, your exit is realistic and envisaged.
As can be seen from the above points, various advisors are required at all stages, and perhaps none more so right from the start, as external, impartial experience and perspective will help guide you and the MBO team through the whole process.
19 December 2019