When businesses are acquired, two common options are management buyouts (MBOs) and management buy-ins (MBIs). While they sound similar, there are some key differences, of which we will explore within this blog.
Ultimately, MBOs and MBIs involve management teams acquiring all or some ownership of the company. Essentially, a MBO is the acquisition of a business by its existing management team while a MBI is the acquisition of a business by an external management team.
What is a management buyout?
A MBO is when the company is purchased by its incumbent management team, so may be seen as a continuation and form of succession in that the exiting owner is giving the current management team the opportunity to drive the business forward.
As the management team is already working within the business, they will be familiar with the company, its customers or clients, suppliers and operation. This gives them an excellent advantage when it comes to evaluating the opportunity on offer and the potential for continued or expanded growth.
Due to MBOs allowing existing management teams to lead the business, it tends to be a more appealing option for exiting owners wishing to preserve the existing ethos and direction of the business while at the same time acknowledging the work that the acquiring management team have already put in.
When it comes to financing a MBO, the management team tends to put some of their own capital into the purchase price, combined with debt financing and even equity investment from outside sources like banks, investors and private equity firms to the extent needed or advisable.
The advantages of a management buyout
There are a number of benefits to a MBO, such as:
- They provide continuity of management.
- Potentially sensitive company information remains confidential as no external parties are involved (absent new investors coming in alongside the management team).
- The time and cost it takes to market your company to third parties is reduced compared to other methods for sale.
- Negotiations regarding the sale tend to be easier as there is already a degree of trust and a working relationship between the seller and the management team. As a result, the sales process is often faster and smoother.
- The chances of a successful completion are higher.
- The transition into new ownership tends to be smoother as there shouldn’t be a dramatic change in management operations.
- It can be used as a way to reward a business's management team for helping to grow the business successfully.
- They are a good option for smaller businesses that may not be able to attract external management teams or third party purchasers.
The disadvantages of a management buyout
While there are lots of great benefits to completing a MBO, there are a number of potential disadvantages as well, for example:
- While the management team will be skilled in and experienced within their roles, it doesn’t necessarily mean that they have exposure to all areas of the business or be able to add any new expertise or perspective to the business.
- A company’s existing management team may not have the time to deal with the MBO process, meaning they’ll need to employ a professional to help with this. At Legal Clarity, we strongly recommend you obtain legal advice throughout the entire MBO process. Get in touch with our management buyout solicitors today for further guidance.
- The current management team may not have the funds to buy the company outright. As a result, terms may need to be negotiated like deferred consideration. This means that all the proceeds from the sale may not be received immediately by the seller.
- The valuation of the business may be lower than it could have been if an external management team acquired the company.
- Due to pre-existing and potential lengthy relationships, negotiations and conversations regarding prices may be awkward or slightly more difficult.
- Conflict may occur if the deal fails, which could impede future relationships.
- If the current owner remains a part of the business (which may be more likely if there is an element of deferred consideration) it may be difficult for the new management team fully to take control of the business.
What is a MBI?
MBIs occur when an external management team acquires a company, often replacing the existing management team. This means that they are not already employed within, or have specific knowledge of, the business. However, they often have significant sector experience that can help them lead and expand the company.
MBIs tend to be more attractive when the current management team isn’t interested in or doesn’t have the ability to enhance company performance and drive value.
In terms of financing, MBIs tend to be supported by private equity firms or other institutional investors that can provide capital for a buyout. The management team can put some of their own capital toward the purchase price, but often do not have the ability to fund the entire transaction on their own.
The advantages of a management buy-in
MBIs have several benefits, including:
- There is a wider choice of buyers which could lead to a higher sale price being agreed upon.
- Due to the potential of the outside management team having more sector experience and knowledge, the company’s growth prospects can be enhanced significantly.
- The new management team may bring new ideas and energy to the company, which could improve employee satisfaction as well as staff and business growth.
- If the current management team isn’t particularly strong, a MBI may be an attractive option for the business.
- MBIs may allow the business owner to exit and receive the sale proceeds immediately.
The disadvantages of a management buy-in
A few disadvantages to a management buy-in include:
- The due diligence process will be significantly more involved and complex, as the external management team will need to understand everything about the business.
- The external management team will likely require greater assurances regarding warranty and indemnity protection.
- The transition process may need to be handled with more care as existing management teams and employees may be skeptical of the new management team and their ability to run the company.
- If the buyer is a competitor, they will discover confidential information through the due diligence process.
- The current owner may not be able to retain a role or ownership stake in the company and may be required to leave on the deal completion date.
How to choose the best option for your business
When deciding whether to undertake a MBO or MBI, there are a few questions you should ask yourself:
- Does my existing management team have the right mix of skills to drive the company forward?
- Have I thoroughly researched the feasibility of alternative transactions?
- Is my current management team heavily involved in the day-to-day running of the business?
- Is my current management team able to manage the finances as well as the operations of the business?
- Can my current management team handle difficult situations such as sales falling?
- Does my current management team have a strategic vision that can propel the business forward?
If you’re unsure on whether a MBO or MBI is the best option for you, our friendly team of management buyout solicitors are here to help you find what works best for your business. Get in touch with us today for further information and guidance.