An MBO (Management Buy-Out) allows a business owner to exit their business via a sale to the existing management team. This provides an opportunity for senior employees who have helped build the business to carry it forwards under direct ownership.

Having advised on many MBOs, the most common scenario is where the owner wishes to retire, and there is ‘young blood’ within the senior management team willing to step into a position of control. This gives the new owners an opportunity to acquire an established business, maintain and hopefully grow it. The new owner has the benefit of knowing the customers, operations and culture, so should be well placed to recognise the value in the business.

There is no reason the former owner(s) cannot stay on, whether for a transitional period or longer term, in their existing or a new role, post-sale. Clients often find this a favourable option as the former owner(s) can provide advice and guidance to the new and also assist in smoothing the client transition.

If a price can be agreed, and if the buyer is able to finance (either through personal finances, a loan or from the future cash flows of the business) then a deal can be done that works for both sides.

An MBO can often be favourable to other exit strategies as: there is no need for a cultural shift; there is a reduced risk in transferring client relationships; and, there is no need to take the business to market. Additionally, there is (one would hope) a greater level of trust between those selling the company and those buying, which can reduce the legal and advisory costs that would otherwise be incurred through a trade or private equity sale.

Here are ten tips to follow if you want to ensure your exit via an MBO is successful.

Don’t

        1.      Discuss price in the early stages

       2.      Hold meetings about the MBO on company premises

       3.      Give management any reason to think their jobs are dependent on the MBO

       4.      Block anyone from joining the team – all who are at the same seniority should be given the opportunity to be involved

Do

      5.      Think well ahead of time when structuring the people in the business

      6.      Document discussions with a paper-trail

      7.      Suggest that any MBO could be in the medium term (i.e. it’s not urgent)

      8.      Be prepared that the payment terms could be deferred over an extended period (often two, three or even five years) and/or based on earnouts
(i.e. dependent on future revenues/profits being achieved)

     9.      Recognise that management teams are likely to be nervous about the the risk

     10.   Be aware that the management team may take a while to form.

If you’d like to discuss the possible routes for you to exit your business, contact Simon Alderwick, simon.alderwick@shawgibbs.com