Management Buy Outs (MBOs)

A management buy-out (MBO) can provide management teams with the opportunity to acquire a significant capital sum through the acquisition and ultimate disposal of the business they know.

The key benefit is that you should already know the business you’re operating in, so there’ll be no ‘skeletons in the cupboard’. 

MBOs are also supported by most funders — as the right management will be best-placed to steer the business forward — and they’re less intrusive for sellers, as there are no external ‘prying eyes’ into the business.

Quite often, sellers leave a proportion of their value on the table and therefore don’t leave the business fully at completion. Sellers who remain active in the business will have built up a lot of goodwill — and to the external environment, this is a positive message and allows for a smooth handover to management. 

The key to buying a business is the timing of the deal. You should never be afraid to ask the owners about the possibility — especially when they’re close to retirement age or have expressed a desire to slow down. 

All too often, we hear that management teams didn’t want to upset the owners and therefore didn’t approach the topic at the right time. The business was then sold to trade and the opportunity lost. Not all sellers like to discuss their exit with management as they don’t want to unsettle them with such discussions.

If you’re unsure about how to broach this subject, speak to an advisor. 

Once you’ve approached the sellers and have the green light that this is a possibility, you need to establish the price that you’re willing to pay for the business and that the funding is available to support the price. 

A deal advisor can work with you to understand the market price for the business and what you can afford to pay — these aren’t always the same. To enable the deal advisor to effect this, you’ll need to articulate your plans for the business once you’ve acquired it — ultimately, how would you further the strategic direction of the business to achieve growth?

You can answer this question by establishing whether you have the right characteristics and ability to effect a successful MBO. While it’s an exciting opportunity, it does come with risk. Although the risk is manageable, you need to enter into the process with your eyes wide open — making an informed choice and fully understanding what the process entails.

An MBO is usually a once-in-a-lifetime opportunity to create significant personal wealth.

For management, this is the opportunity to move from employee to owner and enjoy the benefits of growth during their stewardship. The best MBO teams have already had P&L responsibility and demonstrated that they’re ready to become the owners and take charge of the strategic direction. They’re leaders who are respected in the industry and can bring teams with them.

Management will need to articulate why they’re ready and that they’re the right team to drive the business to further flourish.

We spend a lot of time to coach management through the MBO process and ensure that they’re ready to take on the challenges ahead. Quite often, teams aren’t quite ready or there are gaps in the team. If management approaches us early enough, we can help to secure the best team to undertake the buy-out. Sometimes, this requires external management to support gaps left behind by the sellers. 

It’s market practice to assume that an MBO will sell in five years — and that management and all funders will crystallise their value then. When securing funding, we’ll work with you to demonstrate the value that you could achieve in five years’ time.

An MBO is funded by a combination of management funds, debt, private equity and sellers rolling part of the consideration. The management team is usually expected to invest around one to two years’ salary and quite often the sellers are required to leave a proportion on the table to support the funding. 

The injections of funds from both management and the sellers provide significant comfort to funders. Funders are new to the business and are backing the management team’s ability. Although due diligence is undertaken, more comfort is provided by management investing and sellers leaving a proportion on the table.

The funding for an MBO not only covers the acquisition price but also the growth of the business post-deal. The funding should support the acquisition and the cash flow requirements of the business over the next five years.

Funding partners shouldn’t be chosen on price alone. You’re entering into a leveraged transaction and require funding support to achieve your growth plans. There will be various covenants agreed as part of the transaction and you need funders who understand the business and can work with you. You’ll need a closer relationship with funders than you might expect, so ‘getting along’ with your funder is key. That’s why we encourage management to meet the funders in a more relaxed environment — away from the transaction — to establish whether the relationship can work.

This is a complex transaction, normally only done once. That’s why you need a specialist advisor to guide you through all the areas. 

A deal advisor will help with the price you pay for the business, how you fund this and the ultimate exit to ensure that the MBO is working for seller, management, funders, employees and all stakeholders.

The MBO process will have its ups and downs and can be a rollercoaster ride. We’re able to guide you through this with enough empathy to understand the concerns of all parties but without the volatility of emotions effecting any decision making.