Management buyouts (MBOs) can be an excellent option for all parties involved. The buyer can acquire a business they already know relatively well, something that’s rare when purchasing a business. Whereas, the seller gets the benefit of selling to someone they already know and trust, ensuring their business is in safe hands for the future, as well as often streamlining any due diligence process and speeding up the deal. In this guide, we will explain what a management buyout is and how it works.
What is a management buyout?
As the name suggests, a management buyout is when a company’s existing management team purchases their business from the current owners. MBOs are a popular way of selling a business, particularly if the current owner is retiring or leaving the industry.
What are the benefits of a management buyout?
MBOs offer many benefits for the buyer, seller and business overall:
Benefits for the business:
- Continuity: maintaining business continuity is one of the greatest challenges during the sale of a business. A management buyout reduces the chance of disruption to business operations and can be reassuring for customers, partners, suppliers, and employees.
- Morale: The sale of a business can create a lot of uncertainty for employees who may feel nervous about new owners and their plans. An MBO significantly reduces uncertainty for employees as they already work with the management team and are likely to have a clearer idea about their ambitions for the company. With an MBO, the new owners are likely to experience less resistance from their staff and may even find it increases motivation if they have good working relationships with their team.
Benefits for the buyer (management team):
- Control: taking ownership of the business gives management the freedom to implement their own business strategy. Businesses purchased through an MBO have a greater chance of succeeding, in part due to the insight that the management team brings to the table.
- Incentivisation: as owners, management takes on a personal stake in the business and will benefit financially from improved business performance, motivating them to succeed.
- United approach: with management taking ownership of the business, there is no conflict between management and ownership, increasing flexibility and speed when making decisions about the business’s future.
- Job security: by purchasing the business, management takes control of their own futures, providing greater job security.
Benefits for the seller (current owner):
- Quicker and easier sale: MBOs are often quicker and easier than selling to an external party. There is no need to go through the time-consuming process of marketing the business to find a buyer. Due diligence is often much quicker as well, as the buyer has an in-depth understanding of the business and its operations.
- Legacy: many business owners want to ensure their business and its employees are in safe hands after they sell. If an owner has a good relationship with their management team, an MBO can be the perfect way to secure their legacy.
In addition to these benefits, arranging mutually beneficial payment terms for MBOs is often possible. For example, the owner may agree to be paid in instalments or provide a loan in return for interest or an earnout agreement. This approach can make acquiring the business affordable for management whilst providing the existing owner with a reliable revenue stream for the future.
How does a management buyout work?
Compared to other methods of selling a business, an MBO can be relatively straightforward:
- Initial discussions: whether the current owner or existing management team suggests a management buyout, there will be various initial discussions to determine if the idea is viable before proceeding any further.
- Valuation: if both parties agree that an MBO is something they would like to explore further, they will generally need to have the business valued. It is always best to take advice from a reputable business broker, corporate financier, or accountant to ensure the company is valued accurately.
- Proposal: once both parties have had the business valued, the management team will usually submit a buyout proposal. Although, in some cases, it is the seller who puts this forward for the management team to consider – it often depends on the circumstances and experience of the parties.
- Negotiations: unless the parties are happy to accept the proposal exactly as it is, they will need to negotiate to reach an agreement they are both happy with.
- Financing: with both parties agreeing on the proposal, the management team must secure financing to complete the acquisition. They may be able to fund the purchase themselves, reach an agreement with the owner to secure a loan or arrange deferred payments, secure finance from an external party, such as private equity or bank loans, or through a combination of these options. We expand on how to finance a management buyout below.
- Due diligence: while the management team’s working knowledge of the business and its operation can speed up due diligence, it is still usually required – particularly if a third-party secured lender is involved. Due diligence is a process that includes a series of detailed checks before parties enter into a legally binding contract or transaction, such as buying a business. The management team may have a good understanding of the day-to-day workings, but often there is still a lot that the seller does which goes unseen and documents the management team may not have been privy to such as property leases and so on. For more information, view our guide: The Importance of Due Diligence
- Complete the purchase: with finance secured and due diligence completed, it is time to properly document the deal. To do this, the parties must draft and sign a share or asset purchase agreement, obtain regulatory approval if required, complete various ancillary documents (and more if there are restructures of the shareholdings to take place at the same time), and then transfer ownership of the business to the new owners. This is where engaging experienced MBO lawyers like the Company and Commercial solicitors at Scott Bailey can save time, money, and considerable stress.
- Manage the transition: while MBOs tend to be better for business continuity, it is still essential for the management team to have a plan in place to ensure the transition goes smoothly. Professional advisors such as solicitors are often vital during this period. Whether it’s implementing new policies and procedures or tightening up on contracts and debt recovery, we can assist.
Unsurprisingly, the stages above can often be in different orders, blurred, or elements missed out altogether – there is rarely a one-size-fits-all approach.
How to finance a management buyout
There are many ways to finance a management buyout, from personal savings to private equity. In some cases, the current owner may be able to offer support financing the acquisition; this could be in the form of a loan, which the buyer must repay with interest, or through a deferred payment arrangement, which the current owner could use to negotiate an earnout agreement or to facilitate the sale to their chosen successors.
If buying the business outright or arranging payment terms with the current owner is not an option, the buyer can approach external parties to secure financing, such as banks, venture capital firms, or private equity firms.
At Scott Bailey, our expert Corporate and Commercial Solicitors have extensive experience advising both management teams and business owners on management buyouts. Our highly skilled team can guide you through the process, helping you ensure everything goes smoothly. It’s never too early to start business succession planning! Contact us today to find out more.
