Management Buyouts are an attractive option for business owners looking to exit the business as it involves the existing management team purchasing the business.
Due to the existing management team already having significant inside knowledge of the business, its values and how it’s run, it tends to be a more comfortable option for business owners looking to step away as it can increase the chances of a deal successfully completing and the business continuing to thrive.
What is a management buyout?
A management buyout, also known as an MBO, is a transaction where the management team purchases the business from the owner(s). Deals can also be funded by raising capital through banks, venture capital or private equity, or other lenders and/or investors. Where capital is raised or borrowed, these types of deals are often known as Leveraged Buyouts (LBO).
Learn more about Management Buyouts in our blog.
The advantages of a management buyout
- You’re more likely to retain staff - Due to the existing management team remaining in the company, you’re more likely to retain staff, as they won’t want to leave due to the business coming under new management.
- If you wish to remain in the business, it can be a great option - Often, it is helpful for a seller to retain a small stake in the company to encourage them to help with the handover of the business and to grow it.
- The handover tends to be much smoother - The management team will continue their roles following completion of the purchase. If you choose to consult (or remain employed on a full or part-time basis) for the business after the purchase, this will aid in a smooth transition as you’ll be able to provide advice and be readily available to answer any questions.
- Smoother deal process - If the business is sold to an external buyer, they’re far more likely to undertake more in-depth due diligence as they have no prior knowledge of the business.
The disadvantages of a management buyout
- The structure of an MBO can be complicated - It is important to receive professional advice about the valuation of the business, how the purchase price can be paid on a deferred (or contingent) basis and what protection for the seller is reasonable, so the business is able to grow and afford to make its agreed payments.
- Trust is required and relationships can be affected - Significant amounts of trust in the management team are required when it comes to purchasing your business. You need to properly review whether the team has the right skills and knowledge to run the business. Sometimes additional members of the management team need to be recruited to fill any gaps, especially if the seller is intending to step away from the business following completion.
- Management Buyouts can be time consuming - The management team may need to be trained, assessed and given ongoing feedback to ensure they can successfully run the business.
- There is a risk to your reputation if the business relies on you - For example, if a lot of business is won due to you being a part of the company, the business could potentially be impacted negatively.
At Legal Clarity, our Management Buyout Solicitors are here to help you create the best MBO scenario for you, that transitions business ownership smoothly. We’ll even help you explore other options, so if you discover that an MBO might not be the best option for you, we’ll help you explore alternative routes.
Get in touch with us today to see how we can help you.