What is a management buyout?
MBOs are particularly favourable where the current owners are looking to retire, exit, or step back while ensuring the business continues under familiar and trusted leadership.
They offer growth opportunities, led by key management who already understand the needs of the business.
When would a management buyout be right for your business?
- The current owners are looking to retire or plan for succession: when owners of a business are considering the future of the company for when they decide to retire, or are looking to step away, an MBO gives them this opportunity while offering stability and continuity of growth with the existing management team.
- Strong leadership teams: if the management team (usually the other directors or key senior employees) has the capability, required skills, experience, and commitment to run the business, an MBO can assist with growth, as they will be invested in the long-term success of the business.
- Growth prospects: MBOs are a good option for businesses with a strong track record of profitability and prospects of future growth.
- Financing options: Identifying how the management team will be able to purchase the business is key. There is a range of financing options available, including management’s own funds, debt financing or equity financing through private investors.
Key benefits of a management buyout
- Continuity and stability: the business can continue to operate under familiar leadership who understand the business operations and strategy. They can ensure that customers, employees and suppliers remain confident in the operation and growth of the business. This, in turn, is likely to offer strong retention of the employees and customers, as compared to an outside buyer (where change of control or business restructures may occur).
- Smooth transition process: as the buyers will already be part of the business and understand its needs, the MBO process and transition are typically smoother and quicker than selling to an outside party. Confidentiality surrounding the sale can also be more easily maintained, without the need for potentially sensitive company matters to be disclosed to outside parties.
- Reduced risk: there is a strong likelihood of a successful completion of an MBO, as the transaction process is less likely to cause complications through due diligence and negotiations as compared with an outside buyer. Given that the buyers already understand the business operations, due diligence causes less disruption, and negotiations of key documents can often be easier as they offer a friendlier approach. There is also a reduced risk of failure in the future following the MBO process.
- Alignment of interests: the management team will have an aligned interest in the long-term success of the business through ownership. This can lead to increased motivation and commitment from the management team to grow and offer new ideas for the business strategy going forward.
Preparing your business for a management buyout
- Considering whether this process would be well-suited to your business needs
- Understanding the value of the business and its financial viability
- Financial planning, including understanding how the management team will fund the purchase of the company
- Gaining independent tax and legal advice on the structure to ensure it is tax efficient and offers adequate protection for all parties
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Melissa Chaplow
Solicitor
Melissa is a solicitor in the Corporate team at Myerson. Melissa has experience in a variety of corporate matters, including mergers and acquisitions (both sale and purchase), investments, share buybacks, reorganisations and general corporate governance matters. Since qualifying, Melissa has gained experience advising companies, directors and shareholders on a wide range of corporate matters.
About Melissa Chaplow