A common form of ownership change for a business is a Management Buy Out, or MBO. In this situation, the existing management team will take on the ownership and control of the business from the current owners, often with some form of phased payment terms.
Similarly, a Management Buy In (MBI) is when a manager or management team outside of the business purchases the control ownership of a business.
MBO’s are common where existing owners feel a responsibility to look after their senior management and give them the chance to take on the business. Many have ‘soft terms’ with a lower price or extended payment terms. MBI’s usually occur when a business is undervalued or being poorly managed, and incoming management are needed to turn the business around.
To complete a successful MBO or MBI transaction the seller will need to sell their business at a realistic price along with a deal structure to allow the Management team to buy it, as it is rare for them to have all of the funds available immediately.
Other factors also contribute to the success of a MBO from the business having a great record of profitability to a strong team with a good mix of skills to continue the business.
Whilst many MBO’s and MBI’s will see existing owners exit fully, some will see them retaining some equity for a future sale at a higher price if the MBO/MBI is successful. The management team may also want this to ensure a smooth transition period.
It is a complicated process and involves multiple stages from initial negotiations, and ‘heads of agreement’ to due diligence and deal structure to the final meeting completion meeting. It could take a few months to a couple of years to complete depending on how complex the deal is.
If you would like to go through the stages in more detail, give us a call and together we can review if a MBO or MBI is the right exit strategy for you.