A Management Buy Out (MBO) is a common way for the ownership of a business to change hands. For owners, selling to an existing leadership team provides peace of mind that the business will be well looked after when they move on, which is a high priority for many entrepreneurs when they retire. A MBO is also often seen as a useful vehicle for selling off non-core parts of a group.
For management teams making the purchase, a MBO is an opportunity to gain more from the growth of a company than they would just as employees. It also gives them the freedom to pursue their own plans and take control of shaping future strategy.
Decisions to buy or sell a business are best not rushed and it is in the interests of both the owners and the leadership team looking to make the purchase to plan carefully for a MBO. Here we’ll take a look at two of the key areas that need to be considered agreeing a price and payment structure, as well as arranging finance.
Price and payment structure
With any company disposal, there is always a compromise to be reached between the vendor who wants to receive the highest price possible and the buyer who wants the lowest. With a MBO, there is always the potential for a conflict of interests in the sense that the leadership team planning the purchase can influence the sale price of the business from the inside, for example by hindering performance over a period to make it appear less valuable. To avoid even suspicion of this, it is always best to seek an independent valuation at an early stage, and have a third party advising throughout the process.
From a vendor’s perspective, if you are selling a private company, the independence of the business will have an impact on the price you can achieve. If the business is supported by the vendor’s involvement and the management of it, it could be worth less than otherwise. It makes sense for an owner to take a long view and work towards making a business largely autonomous from them before considering a sale.
In many cases, part payment for a MBO is future financial performance, through structured arrangements known as deferred consideration or earn-outs. The latter involves deferred consideration dependent on future financial performance. Structuring payments like this not only helps finance the deal, it gives both parties a stake in the ongoing success of the business. The buyers need solid profitability to meet payment obligations while, in the case of an earn-out, vendors could receive more than the initial agreed valuation. This creates an incentive for them to leave the business in as strong a position as possible.
It is rare for management teams planning a MBO to be able to raise the capital required to buy the business outright through their own private means. The usual options for raising capital apply, including seeking private equity investment. This requires a sound business case to be put together that can demonstrate potential for capital growth, meaning the company needs to be in a strong position.
Debt funding capacity would involve consideration of asset backing (e.g. trade debtors for invoice financing) and cash generation. The number and types of funding options have increased over recent years although funders still use very strict criteria in their evaluation of funding capacity for a MBO or any other type of deal.
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Our award winning Corporate Finance team are on hand to answer any questions you have about an MBO, they have decades of experience advising both seller and buying parties. Contact them today on 0161 832 6221