A management buy-out (MBO) can be an appealing way of taking a company forward for all parties. Nobody knows a business as well as its management team \u2013 they understand the customers and staff, as well as any challenges which will need to be addressed going forward, which will provide assurance to the outgoing owner and the company\u2019s employees.<\/p>\n\n\n\n
There is also the potential for high returns for the individuals behind the buy-out, as the opportunities and market are well known to them. It\u2019s fair to assume that with a fair wind, they will be able to maximise the outcomes for the business in the future.<\/p>\n\n\n\n
In 85% of all MBO deals, both vendor and buyer come away from the negotiations completely satisfied according to research from Coutts<\/a>. So, why do MBOs often sit down the pecking order when an owner comes to exit a business?<\/p>\n\n\n\n Although there is a raft of benefits which come with selling to management, MBOs aren\u2019t without their issues. Let\u2019s take a look at what can make an MBO fail to materialise. <\/p>\n\n\n\n An MBO can offer the vendor the best available deal, but that doesn\u2019t always mean the best price.<\/p>\n\n\n\n It can offer a very attractive deal structure, and by doing \u2018right by the business\u2019, help to preserve the entrepreneur\u2019s legacy. But if an owner is adamant on getting the most money for their stake in the business, they might favour a trade sale.<\/p>\n\n\n\n More than a quarter (27%) of entrepreneurs say they\u2019re only prepared to consider an MBO as a last resort, due to those concerns around price \u2013 but also a perceived risk that the deal could cause their relationship with the management team to deteriorate.<\/p>\n\n\n\n Sometimes an MBO won\u2019t get off the ground due to a stalemate in initial talks. Clearly, before negotiations can begin to take place, someone has to place the MBO option firmly and squarely on the table.<\/p>\n\n\n\n However, there might be a reason why both sides are unprepared to make the first move. From the owner\u2019s perspective, they might see it as the management team\u2019s responsibility to float the option, with the expectation that they present a compelling case for a deal. But managers might be reluctant to open the dialogue for fear of it being seen as some sort of \u2018coup\u2019 \u2013 owners aren\u2019t always transparent about their exit strategy.<\/p>\n\n\n\n Sometimes it takes a third party, such as an advisory firm, to plant the seed of an MBO. But, really, it shouldn\u2019t have to come to this.<\/p>\n\n\n\n Management teams might automatically assume that an MBO is beyond them because they do not have the funds to meet the consideration. However, this might not necessarily be true.<\/p>\n\n\n\n While a management team will indeed need to invest a sum of personal money for a stake in the business, very few buyouts are majority funded from the resources of the managers themselves.<\/p>\n\n\n\n In most cases, MBOs are funded through a finance package which might include bank loans, private equity, invoice finance and, more recently, a Coronavirus Business Interruption Loan (CBILS).<\/p>\n\n\n\nIssues affecting MBOs<\/strong><\/h2>\n\n\n\n
Perceptions from the existing owner<\/em><\/h4>\n\n\n\n
No one is prepared to make the first move<\/em><\/h4>\n\n\n\n
Misconceptions about personal funds required to finance a deal<\/em><\/h4>\n\n\n\n