Published

August 11, 2022

What is a Management Buyout? 

An MBO is a change of corporate ownership where the company’s current managers acquire all or a large part of the company’s shareholding from the current owner, whether a larger corporate group or private shareholder(s).

MBOs are often triggered when the founder of a business wants to retire.

It is an attractive option when an established business is now being run day-to-day by a management team, and the owner(s) are relatively hands-off and want to exit the business.

MBOs also occur when a parent company wants to dispose of part of its business. Rather than finding an external buyer, selling to the incumbent management team can be a better way of disposing of the business unit and freeing up the capital.

What are the Benefits of a Management Buyout?

For an Exiting Owner

  • It’s an attractive succession plan.
  • There will be continuity of management.
  • No requirement to disclose confidential information to outside parties.

For the Management Team

  • Hopefully, there is a track record of profitability and a strong team with a clear vision of the future direction for the business.
  • They have a good understanding of the business, including customers and staff.
  • There is a limited risk as they know the business challenges ahead and should already be planning for those and taking them into account with the valuation.
  • Seen as a good investment because of the stability it affords the business.
  • There is the potential for high returns as the opportunities and market is known.

For Existing Owners

  • Typically a low-risk way of selling the business.
  • Information on the MBO can be kept confidential.
  • They do not run the risk of disclosing commercially sensitive information outside the business, which could occur if you are selling to a competitor.
  • The process is very controlled compared with other potential ways of disposing of a business.
  • Selling to the management team secures the future for the business, which is often important to founders as they have spent many years working in the business building it to where it is today.
  • There is often a strong emotional attachment to the business, and the staff for long-term founder/owners.
  • Vendors may be asked to delay a percentage of the purchase price of the business, and may be more willing to do so if they know and trust a team that they have worked with.
  • Debt may be able to be raised on the existing business based on its current trading, and the remaining equity may be secured either by way of equity investment or alternatively a vendor’s loan. 

For Small Businesses

  • There may not be as much interest from trade purchasers.
  • Allows the current owners an exit strategy.
  • Current owners will benefit from the sale of their business. 

Legal Documentation for an MBO

Whilst financing these transactions is a key element to enable the purchase to go ahead, another key part of an MBO is the legal documentation regarding the transaction.

It is important to consider the business’s ability to afford any new lending and the payment schedules, the legal side of the transaction is also a very important factor and should be carried out by experienced legal professionals who have carried out corporate transactions previously. This will help to ensure that each party is given advice to ensure that the transaction is exactly as they perceive it to be.

This may include loan documents, non-compete clauses and other representations and warranties that may need to be made by outgoing shareholders. 

What are the Disadvantages of an MBO?

  • The business valuation may be lower than could be achieved through a trade sale, as a management team may not pay for the synergies available to an external buyer.
  • The management team may struggle with the range of different skills required to be a ‘business owner’.
  • The management team may struggle to raise sufficient external funding for the deal.
  • Typically the management team must inject some of its own funds. The team may not have sufficient personal wealth to do this, so, for example, may need to remortgage their home which increases their personal risk profile.
  • A lack of available funding may mean a higher level of deferred consideration is required; this increases the risk to the vendor as they will not get all of their money on day 1.
  • If an MBO does not proceed, this risks damage to the vendor’s relationship with their management team, which may have a detrimental effect on the business going forward.

What Is a Management Buy-In (MBI)?

A management buy-in (MBI) is a corporate action in which an outside manager or management team purchases a controlling ownership stake in an outside company and replaces its existing management team. This type of action can occur when a company appears to be undervalued, poorly managed, or requires succession.

A management buy-in differs from a management buyout (MBO). With an MBO, the target company’s existing management purchases the company. MBOs typically require financial resources beyond those of management, such as a bank debt or bonds. If a significant amount of debt financing is required, the deal is described as a leveraged buyout (LBO).

Management buy-in (MBI) is a corporate activity. In management buy-in, a company is purchased by a manager or a management team from outside the company. The target company is acquired by outside investors when the company’s decision-makers consider it to be underperforming, and the company’s products could generate greater than current yields with the proposed change in current business strategy and/or management. After the acquisition, the buyer can replace the current board of directors of the company with their representatives. In many cases, there is competition among buyers to purchase a suitable business. Generally, these management teams are led by experienced managers at the managing director level.

The difference between management buy-in and management buy-out is the position of the buyer. In the case of a management buy-in, the buyers are external to the target company. In the case of a management buy-out, the buyers working for the target company.

What is the Process of a MBI?

Company Analysis

  • First, the buyer conducts a market analysis on the target to gather data on its buyers, sellers, competitors, suppliers, substitutes, products and services, customers, the scope of business and the financials.
  • The buyer must also know what other companies are looking to buy the target because this will affect the price.

The Negotiations

  • Based on the analysis, the buyer prepares an offer for the target company’s owners.
  • Both parties will negotiate the price and may reach an agreement.

The Transaction

  • Once an agreement on the price and terms is reached, the transaction will occur based on the local rules and regulations.
  • When the transaction is complete, the buyer officially becomes the owner of the company’s management and can nominate their representatives as the board of directors.

What are the Advantages of Management Buy-Ins (MBIs)?

  • Companies that undergo an MBI tend to be undervalued, and the buyer can sell the company at a higher price in the future.
  • If the current owners of a company are unable to manage the company, an MBI is a win-win situation for both the buyer and the seller.
  • A new management team might have better knowledge, contacts, and experience, which can often stimulate growth in a company, maximising the shareholders’ wealth.
  • Current employees may become motivated because of management changes.

What are the Disadvantages of MBIs?

  • There is always the possibility that an MBI will not have the desired affect, and the new management team may fail to bring the required growth to the company.
  • Existing employees may feel demotivated by the changes.
  • The buyer may end up paying way more than required if they estimate the value of the company incorrectly.

There’s a lot to consider when looking into MBOs and MBIs. Provide’s team of financial experts is happy to help you navigate the process to ensure the best possible outcome and a smooth transition for the new management team.

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