Are you thinking about selling your business?
Your typical options are:
- Selling to a private third party buyer
- Passing the business to family
- Winding up the business
Or your fourth option – Management Buy out (MBO).
What is a management buy out?
Management buy outs are used in businesses to buy the existing owners out of a business, but can also be used to separate business departments. MBOs can also happen when an ambitious management team want to take over part or all of the business, or where the current shareholders have decided to exit the business. Reasons for this include retirement or to extract cash out of the business to claim entrepreneurs relief.
MBOs can happen in any industry with any size of business. Personal resources, seller-financing and private equity financiers are common sources of funding for MBOs.
There are certainly advantages and disadvantages to a management buy out, and this article serves to provide an informed decision if you’re unsure which is the best way forward for your business.
MBO advantages
- You don’t have to spend time and effort marketing your business to a third-party buyer
- Easier to agree a value for the business sale
- Contracts and sales processes can be quicker
- You can retain confidentiality around the sale
- Business continuity remains the same
- Warranties and indemnities in the legal sale agreement can potentially be restricted
- Usually more control is retained for the vendor than with a sale to a third-party
- Typically, MBOs stand a higher chance of success and profit than bought by a third-party
- Maintain relationships with key clients and suppliers
An MBO is a good choice for businesses that are too small to attract a trade buyer.
MBO disadvantages
- Raising capital to fund an MBO can be a challenge
- A lack of available funding may mean a higher level of deferred consideration is required, placing risk on the vendor
- Potential lack of business ownership experience
- 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
MBO’s are most common when it is hard to find an external buyer and/or where a number of managers are key to the company’s success. But there is no one deal structure that suits every business.
Key things to bear in mind
What follows is a list of elements to think about when considering an MBO:
- Check the feasibility of the transaction
- Be open and transparent with executives and shareholders
- Whether the transaction will be a share or asset purchase
- Potential income tax liabilities for the new management
- How will an earn-out structure look?
Your Business Lawyer
Having the right lawyer can make or break an MBO deal. Ultimately, you should receive sound advice on the right selling strategy, help you to achieve an accurate business valuation, assist with the transitional period, minimise your workload, and establish a tax plan to ensure you pay the least amount of tax on exit.
In more detail, Your Business Lawyer assists with:
- An outline of the future business plan and forecast
- A detailed understanding of the company financials, including normalised working capital, normalised profit, cash and debt
- Up to date, fair asset values of any equipment intended to be used in asset finance arrangements
- Impact of any discounts that may need to be applied
- The company’s current debt capacity, if further debt is intended to be used as a source of funding
- Anything that may impact future growth or free cash flows of the business
The team at Your Business Lawyer have done hundreds of management buy ins and buy outs, and so we know what we’re doing, we do it excellently well and on time and on budget every time. If you’re thinking about an exit strategy or have questions about the MBO process, get in touch today to find out how Your Business Lawyer can help.
