Expert Opinion: Six considerations for a successful MBO

Paul Tyrer, corporate partner at Cheshire law firm SAS Daniels, discusses what a management buyout (MBO) involves and six considerations when planning for a successful MBO.

A management buyout is a common way to sell the ownership of a business to an incumbent management team who are already familiar with the business. For owners, this can provide peace of mind in ensuring a smooth transition for both staff and customers, which is usually a high priority when entrepreneurs seek to retire. For the management team, the MBO route will also provide a platform to take ownership of a company they know inside out, without assuming the risks which would not be readily apparent from acquiring another more remote business and undertaking a higher level of due diligence.

However, to be successful, a management buyout requires both careful planning and execution, sometimes many months and years in advance.  

6 issues to consider when planning a successful MBO

An early Independent Valuation is advisable

Clearly the owner will want to achieve the best possible price when selling his or her business. This may not be as easily achieved via a sale to an existing management team, who may expect a discounted price or may even seek to influence the price by massaging the performance over a period of time, to make the company appear less attractive to a third party purchaser. Agreeing a price early on in the process is vital, possibly by reference to an independent valuation.

Skills, training or recruitment requirements?

Does the management team possess all the necessary skills to run the company post-completion? The team should be analysed objectively at an early stage and any skills shortages addressed via recruitment or mentoring.

How can the management team raise capital?

Funding is likely to be a key issue. The management team are unlikely to have sufficient personal financial resources to fund the purchase price in full and so will need to raise capital from either debt or equity, or more likely a blend of both. A robust business plan and sound corporate finance advice are a necessity. Funders are likely to require a demonstration of commitment from the management team – sometimes referred to having some “skin in the game”. This demonstration of confidence in the proposition usually involves either an introduction of personal funds into the deal or guarantees and indemnities typically secured on personal assets such as the matrimonial home.

Deferred payments or an earn-out post MBO

One option is for the deal to be part financed through deferred payments to the seller or an earn-out. This is where the seller receives payment in a number of instalments often linked to the future trading performance of the business. However, the seller will likely require some protection either via security over the assets of the target, or at the very least some control over how the business will be run. Such controls need to be fine-tuned in the sale and purchase documentation to avoid unduly fettering the day-to-day running of the business by the management team.

Don’t overlook the shareholders’ agreement

One document that is often overlooked in the eagerness to conclude the deal is the shareholders’ agreement between the various members of the management team. A carefully constructed shareholders’ agreement is crucial to the ongoing relationship between the new managers, as the journey post-completion is likely to have a few twists and turns. A well-crafted shareholders’ agreement will deal with a number of key issues including sale and transfer of shares, what happens if one member of the team leaves or is required to leave the company and what decisions will require majority or unanimous consent.

How long will an MBO deal take?

The deal process is likely to take some time – typically around 6 months or more to complete. Both the seller and the management team can be distracted from the day-to-day running of the business by the deal process which can become all-consuming. Choosing the right advisers is crucial to ensure that the parties are not overwhelmed by the process.

Embarking on a management buyout can be a daunting proposition even for seasoned business owners; but through careful planning, structuring a sale in this way can motivate the existing management team to share in the success of a business, whilst maintaining business certainty for both staff and customers alike. For the seller, an MBO provides an opportunity to achieve a successful exit and ensure that the business continues for another generation under their choice of leadership.