What is a Management Buyout?

A management buyout or an MBO, as often referred to, is when a business owner sells the shares in a company to the existing management team. 

When looking to exit a business, a management buyout is one of several options a seller may pursue. While this is a preferred option by many, as it allows the business to carry on independently in what is believed to be safe hands, it can also be a lengthy process that places significant pressure on management teams and those around them. 

With years of experience navigating matters within this area, we’ve put together this blog to answer any questions you may have about what a management buyout is.

How Does A Management Buyout Work? 

The management team will combine the necessary resources (skills and funds) to acquire all or part of the company they manage.

Once the business is acquired, the management team will own the shares in the company, will be in control of and responsible for taking the business forwards, supporting its growth. 

It may also be an option for a larger company to sell a division of the business that is no longer part of its core services.

Financing a Management Buyout

1. Both the buyer and the seller(s) agree on the main terms of the sale – perhaps most importantly, the purchase price and when this will be paid. This may include an independent valuation;
2. The management team determine the amount they are able to invest;
3. A detailed financial analysis is conducted. This includes building a forecast financial model to reflect the serviceability of debt and returns to potential investors;
4. An approach to funders is made - small buyouts may involve just one funder, while larger transactions may require several funders invest/lend. 

In order for an MBO to be completely successful, a vendor must be willing to sell the business at a realistic price. In most cases it is rare to see a management team with enough funds to buy the company, therefore external finances are generally required. This can include a combination of sources, such as: 

• Management contribution – the management team is required to introduce personal funds. The rule of thumb is at least one year's salary.  
• Asset finance – leveraging against other assets in the company such as property or stocks. 
• Bank debt – banks can provide a cash flow term loan, commonly repayable over 3-5 years. 
• Private Equity (PE) – these funds look to back the management team in a bid to scale the company. 

If the above fails or is not suitable, then vendor loan notes can be used to help fund the transaction, which involves the vendor themselves helping towards the funding and leaving their consideration in the company as loan notes to be repaid over time. 

Additionally, a crucial part of the process is the share purchase agreement.  You will need a solicitor to assist you with this.   The entire process from start to finish can take around 4 months, which is roughly the same as a trade sale. Therefore, both the vendors and the management team must be fully committed to the transaction for the duration of that timeframe.  

Advantages of a Management Buyout

Smoother Transition

Perhaps the most obvious benefit is the smooth transition from one owner to another, reducing the risk of failure. This is because the new owners already know the company, employees are less likely to be concerned, and existing clients can be reassured they are receiving their services as normal. 

Faster Process

Finding the correct person to buy a business can be a long and expensive process, however, selling through a management buyout means, you do not need to market or recruit for one. This then makes the process cheaper.

They also generally have an in-depth knowledge of the company they are purchasing, resulting in minimal due diligence.

Fewer Warranties

The sellers don’t have to give as many warranties in connection with the company they are selling, therefore limiting their future liability

Disadvantages of a Management Buyout

The Management Team’s Experience 

Whilst the management team have knowledge of the running of that specific business, they have often never owned one before, which requires a completely different skills set. This could negatively impact the growth of the business in the future.

The Sellers’ Contacts 

The sellers are often key personnel who have vital contacts within their industry. On their departure from the business, these relationships can diminish. 

Complex Process 

It can be complicated and time-consuming to carry out yourself, especially when you are trying to run a business or manage a team. Luckily, solicitors are well-trained in this area and are equipped with the necessary knowledge to ensure all goes smoothly from start to finish. 

Raising Funds

Raising the funds required can be difficult for the management teams and could result in major financial burden. However, there are options in place to support the management team during this process.

How Can We Help? 

For all your business exit needs, including navigating the management buyout process, contact the team at Smith Partnership today.  

It is important to involve experienced solicitors in the process as soon as possible. We can ensure that every aspect of the MBO is managed smoothly, such as considering how the deal is structured, due diligence and funding, right through to the finalisation of the deal.