What is a management buyout and what are the benefits?

Having built up a successful business, you may decide it’s time to move on and explore the options you have for exiting the business.

Or perhaps you are part of the management team of a company, and you currently don’t have any ownership or shareholding in the business.

If so, it may be that a Management Buy-Out is the right option for you. To assess the best option for you and your business, it’s best to assess your personal and business goals and what the future may look like.

What is a management buyout?

A management buyout is where the business is sold to the Management team, primarily funded through a combination of debt raised against the business, equity rollover and loan notes or preference shares. It may also involve bringing in external equity funding from an angel investor, venture capital firm or private equity house.

MBOs enable shareholders to extract equity value and de-risk in a controlled manner and to pass ownership onto the management team so they can continue to grow the business and generate future value. It also enables management teams to acquire a stake in the business they run, so that they can benefit from the future growth in the business that they deliver.

What are the benefits?

MBOs are a fantastic option to protect the legacy of a business and the future of the workforce. Rather than trying to market yourself to third party buyers, with an MBO, the potential buyers are already in the workplace, saving you a lot of time, energy, and money.  MBOs also help to incentivise the next tier of management, which may be your loyal staff that have helped to develop the business to where it is today. The process is also usually a lot simpler as there is already knowledge there with management, so due diligence requirements may be lower.

As well as this, selling to internal buyers ensures continuity for clients, suppliers, and other staff. It also means important and sensitive information does not need to be disclosed to external parties.

With MBOs, current shareholders don’t necessarily need to sell 100% of ownership, and in certain circumstances you could still be the largest individual shareholder, having the ability to say no to key future business decisions.  This can help in phasing an exit plan for current shareholders whilst overseeing the next tier of management as they grow into their new roles.

An MBO may be valuable in situations and markets where the number of trade buyers is limited or where you don’t want to sell to a competitor.

What to consider for a management buyout?

Here are some considerations that business owners, management teams and finance professionals should have in mind when looking at MBO as an option for their company: 

  • Funding: An MBO can be funded either through external capital (debt and/or private equity) or through a combination of vendor and/or management team funding. The funding market is extremely well developed and there is vast array of options available to fund MBOs 
  • Business Plan: If third party funding is required, it will be critical to have a well formulated business plan and financial forecasts, typically for the next 3-5 years. These will be reviewed and interrogated during the due diligence phase 
  • Management team: As the name suggests, an MBO requires a strong management team that can run the business independently from the existing owner. Therefore, it's essential to evaluate the management team's skills and experience to ensure that they ready to lead the business going forward 
  • Due diligence: Management will have a good understanding of the business, and this should reduce the level of due diligence required versus a trade sale, especially if no external financing is required 
  • Valuation: The value of the company needs to be carefully assessed to ensure that the price being paid is reasonable and fair. A third-party funder may require an independent valuation of the business, or this might be ascertained through a competitive auction process 
  • Legal and tax: MBOs can be complex from a legal and tax perspective, so it's essential to work with experienced professionals who can guide you through the process and ensure that all legal and tax considerations are properly addressed.

What’s next?

Careful planning is required to ensure that the next tier management team have the drive and ability to take on additional responsibility and help the business to pay down potential debt raised as part of the MBO.

In general, managing a business whilst also trying to acquire it can present some obvious and significant challenges; there are many factors that need to be considered including finance raising, deal structuring, deal management and tax planning, to name a few. Having a trusted advisor can provide management with the confidence to make the difficult steps to business ownership.

Get in touch

If you’d like to know more about management buyouts and how our team of deal advisory, tax and financial planning advisors can assist, please use the contact form below. 

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How we can support you if you are looking at a Management Buy-Out?

Our deal advisory, tax and financial planning advisors can support you through all stages of an MBO.

We will work with you to:

  • Help you understand what your business is worth
  • Understand your key objectives and timing so that we can help advise on the most appropriate transaction structure
  • Understand the potential future value of the business, using our financial modelling experts, to help understand the opportunity for the MBO team
  • Understand the capital/financing requirements to deliver on those objectives and help you identify the right source of capital to meet those objectives, whether that be through cash on the balance sheet, a vendor backed loan, external debt, or new equity from an investor
  • Help you approach and engage with the right investors for your business if required by engaging with our extensive Private Equity network of relationships
  • Understand your objectives and approach to find the right partner, not only based on financial metrics but non-financial ones as well, such as personality, sector experience, previous investment performance and house style
  • Prepare marketing materials that will position your business in the best light, including a business plan, teaser, and information memorandum to help secure external investment if required
  • Help you prepare the business for sale, including gathering financial and other information to ensure you are ready for a potential investor’s due diligence process
  • Work with you to understand the potential future value of the business, using our financial modelling experts, to help you compare and contrast different investment offers
  • Design a bespoke process and manage it closely from inception to completion, liaising with the various legal and accounting advisors, creating competitive tension amongst lenders/investors, and minimising the burden on you as you continue to run your business
  • Advise you and negotiate on your behalf all the key elements of the transaction to ensure you get the best deal possible
  • Advise you of your potential tax exposure for any relevant transactions, both for you personally, the relevant employees and the business to ensure you have clarity over any potential tax exposure
  • Undertake a thorough exploration of your individual circumstances as well as the business in order to identify and consider any tax reliefs that may mitigate your tax exposure and ensure any tax traps are understood and navigated in order to provide a bespoke tax plan as part of your strategy
  • Advise you on alternative deal structures to ensure tax efficiency, where appropriate.
  • Manage and obtain relevant clearances from HMRC on your behalf, where appropriate.
  • Advise you of your reporting requirements to HMRC in order to minimise the burden and give you peace of mind
  • Calculate the level of capital required from the transition to meet your objectives and provide security, using sophisticated cash flow forecasting tools. This helps you understand what is needed and what is aspirational
  • Advise you on how to invest the sale proceeds to meet your objectives, including a review of existing investments and pensions to ensure they are used to best effect
  • Work with you in advance of the transition to agree on a personal financial plan, so plans and investments can be implemented efficiently once proceeds are received
  • If desired, meet with the new management team to help them understand their own financial position, to give them confidence entering into such a transition

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