If you are thinking of selling your business and are looking for an alternative to a third party buyer, then a Management Buyout (MBO) could prove to be the right route for you.
What is a Management Buyout?
Essentially an MBO is when the existing management team comes together to acquire all or part of the company they manage.
Following the sale, the management team usually assume control of the company and its assets and operations. This is a positive way of using existing expertise to drive future growth and ensure the continued success of a business.
Why consider a Management Buyout?
There are a range of reasons why an MBO might be an attractive option, including:
- A lack of viable third party buyers;
- Confidence in the management team and a conviction that they offer the qualities to secure the future of your company; or
- Reluctance to disclose sensitive information to competitors in the market.
What are the benefits?
With an MBO, you are transferring ownership to an experienced management team. This means the new owners already have hands-on knowledge of your company – giving you greater conviction in a seamless sale process and future business security.
Other benefits include
- A more efficient due diligence process, with funders requiring less complex information;
- Reduced requirement for any internal or procedural changes;
- Reassurance for employees, as detailed company knowledge makes for a smoother transition process and less disruption; and
- Confidence for customers as existing relationships can be maintained.
Points to consider
There are several key decisions that will need to be made between yourself and your management team before you can confidently progress with a sale.
Clearly, agreeing a price for your company will come top of the agenda. A fair valuation needs to be established between yourself and your management team. You will need to seek professional advice to understand and calculate a commercial valuation that is suited to the proposed MBO structure.
There will also be a number of tax implications that you and your management team need to consider and prepare for. It is advisable to seek professional advice when it comes to tax and MBOs.
Here are just a few of the tax related questions you will need to understand and agree on with your management team:
- Will a NewCo be created as part of the acquisition, or will the purchase be made by individuals?
- How will the acquisition be structured – as shares or an asset purchase?
- Is Business Asset Disposal Relief available and what are the consequences of this?
- How will your management team be remunerated moving forwards?
- What are the VAT considerations?
- What costs are tax deductible?
How is it funded?
Your management team will need to agree how they will finance the buyout. The team will often raise a proportion of the funds themselves but it is likely that they will need to look to a mixture of third party finance and seller loans to fund the remainder.
Types of third party finance that are commonly sought include
- Private equity funds, usually invested in companies that offer an opportunity for a high rate of return – such funds normally support MBO’s in mature companies;
- Asset finance will enable the management team to borrow funds against the assets within their company, these might include inventory, plant and machinery or property. This can offer a secure way of getting working capital for the business;
- Invoice financing provides a means to release finance tied up in unpaid client invoices, providing faster access to capital; and
- Bank loans are an established way of sourcing finance for an MBO. Many cash flow term loans are repayable over 3-5 years.
Buy-In Management Buyouts
A Buy-In Management Buyout (BIMBO) offers a variation on the same theme. This is where external management is recruited to complement the existing MBO team. Often in the SME sector, external management are able to offer both expertise and financial investment.
How we can help
Our experienced Corporate Finance team will guide you through the complete MBO process, making sure that the right decisions are made at each step. The acquisition of a company by management can be a challenging and uncertain time for all parties, but with professional guidance and the right approach, you can maintain the seamless operation of your business and achieve the sale you had intended.
Our team have successful experience in both Management Buyouts and Buy-In Management Buyouts.