Journey to exit — pros and cons of management buy-outs (MBOs)

Growing a successful business takes time and dedication. When it comes to your journey to exit, it can be difficult to let go and there’s no ‘one size fits all’ approach.

A tailored exit plan is often fundamental to ensuring the successful succession of a business. Here, Nikki Whittle and Adam Goadsby explore management buyouts (MBOs) as a route to exit and weigh up the associated benefits and drawbacks.

What is an MBO?

A management buy-out is exactly that — in essence, the exiting shareholders of the business sell the company to the existing management team. The management team will accumulate funding to acquire the business, with the source of that funding usually depending on the size and nature of the of the company acquired.

While the options are flexible, MBOs are typically funded through personal resources, private equity and/or seller-financing and debt.

MBOs — key benefits

Protecting company culture

One of the key selling points of an MBO is that the existing management team already understands the business and usually plays a key role in supporting day-to-day operations. 

Selling your business to individuals you already trust to run it can offer peace of mind when realising your investment and leaving the business behind. It could also avoid teething issues and changes in company culture as senior managers continue to run the business in a way that works — just this time, with more skin in the game. If it isn’t broken — don’t fix it…

Quick, straightforward exit process

The opportunity for a smooth transition can also translate into the actual legal process that’s required to sell the business. 

Since the management team is already familiar with the ‘ins and outs’ of the company, a greater degree of business risk may be accepted than with prospective outside buyers. 

In turn, this means that sensitive business information remains in-house. There may also be associated cost savings as the back-and-forth disclosure and negotiation processes are streamlined. 

This can provide a quicker and more straightforward exit for the seller — minimising the complications often associated with other sale structures.

MBOs — potential complications

Although an MBO offers the management team a unique opportunity to leverage its expertise and passion for the business while transitioning into ownership, there are complications to consider.

Warranties

It’s true that the related disclosure exercise might be simplified in some respects, yet the giving of warranties can be a tricky area for management. Where private equity is involved, this can sometimes leave management between a rock and a hard place — pitting the team against both the seller and private equity investor. Any sale agreement must sit comfortably with all parties involved.

Terms for equity investment

The typical terms for management's equity investment can also pose a complex issue.

An MBO is typically structured by issuing different classes of shares to the management team on the one hand and to the private equity investor on the other. However, management will have certain specific rights and limitations attached to its shares, including ratchets, transfers, leaver provisions, exit-related rights, step-in and enforcement rights. 

The tax treatment of management's equity investment is another important factor to consider.

Balancing responsibilities

Finally, from a practical perspective, balancing the management team’s involvement in an MBO with its current responsibilities as directors and employees can be challenging — as can dealing with the terms of any new employment agreements.

Talk to us

If you think that an MBO could be a suitable route to exit for your business, our integrated deal advisory and corporate legal team can assist from day one. We’ll ensure that risks and hurdles are assessed and addressed up front to provide more certainty on every transaction.

Start your journey to exit today — talk to us by giving us a call on 0333 004 4488, sending us an email at hello@brabners.com or completing our contact form below.