Developing a successful company and seeing it grow through the years can be a time consuming transaction that could take a lifetime. As rewarding as it is, there may be a situation where the owner wants to hand over the reins to their management team and take a step back. So what happens when you’re ready to exit your business?
In this article we will discuss the ins and outs of what a management buyout is to help give you some further structure on the strategy should this be something you’d look to do in the future.
A management buyout or otherwise known as a ‘MBO’ is a process for transferring ownerships of a business. It usually involves the purchase of all or even part of the company by its already existing management team. This can also include the help of external finances. In the majority of cases full control is taken over by the management team of the business and the owners retire or begin new ventures. MBO’s often come to light because the management team feels they can increase the profitability of the business and this is often with some form of phased payment terms.
So why are MBO’s considered a great exit strategy?
Management buyouts are seen as good investment opportunities and can be a quicker streamlined process for exiting a business. As owners are passing their business across to known and trusted individuals it gives the seller peace of mind and creates a faster sale to push through. As the buyer in an MBO, it’s quick and the least risky way to be able to take further ownership of a business. In taking on more ownership they can be expected to take home a larger chunk of the profits whilst reaching their own personal goals and ambitions.
A smooth transition period is what any seller or buyer could wish for and fortunately MBO’s allow this to happen with little complications. As negotiations with the existing management team are had it enables management information to stay within the business and therefore giving a higher degree of confidentiality rather than what would happen with a trade sale. In regards to the legal sale agreement you can also potentially have warranties and indemnities restricted.
However, like everything there is also disadvantages to the clever management buyout strategy which you should factor in before jumping in head first.
MBO’s are a complicated process and involves multiple stages from initial negotiations, and ‘heads of agreement’ to due diligence and deal structure to the final completion meeting. It can take a few months to a couple of years to complete depending on how complex the deal is. You may also find difficulties in raising funding for the business due to financial institutions less forthcoming with funds as MBO’s purely involve internal individuals.
It can be a tricky option depending on the circumstance and price expectations from owners of the company can be one of the biggest challenges. Potential overvaluation of the business can come into play too so you have to be mindful of this before entering into such transaction because markets will have their own valuation of the company and therefore there is no guarantee it’ll be easy to raise the funds that the owner has requested.
Planning is Key!
Yes that’s right the key to a successful MBO process is to plan and to plan well. Making sure that you’re planning and sussing out the main strategies for the business, deciding the responsibilities across divisions and planning the objectives and time frames for the deal. The management team should have all their planning completed before the deal has been closed and already implementing the way the business will be run after the sale is complete.
So what should you consider when planning a management buyout?
We have summed up a few points that we feel are important to consider when you are planning your Management Buyout strategy.
- Make sure you have your finances in order.
- Implement a clear and structured shareholders agreement.
- Until the deal is signed, keep the MBO very low-key.
- Remain friendly and civil throughout the whole process.
- Ensure that you are transparent with shareholders and executives.
- Before you begin, research the feasibility of the sale/transaction.
- Understand the tax implications of the transaction. Get advice as part of the planning process, not after the event!
- Include key employees in the deal so that the equity can be shared with these individuals.
- An employee and customer retention plan needs to be put in place.
- Be careful to not neglect the key operations of the business while focusing on the deal.
- Work out the value that is held in your business and complete a valuation.
Each and every deal is different and unique but management buyouts tend to have common challenges that you may face. Management teams are very often busy with their day to day role and therefore depend on professional advice to help streamline the transaction process and take some of the stress away. It’s good to have advisors that can understand the dynamics of the transaction and appreciates the complexity of having commercial conversations where existing relationships have been made.
Your Tax Partners and Mark Holt & Co can be that trusted advisor you need helping to make a challenging transaction less stressful. Contact us today and we can begin planning your MBO to give you the future you’re working towards.