A management buyout (MBO) is the general term used for a business acquisition where a company’s existing managers acquire a part or all of the company for which they work.
MBOs may occur for a number of reasons, including retirement sales or disposal of non-core business activities, and can be an attractive option for a management team with an ambition to own their own business. From a seller’s point of view, a MBO potentially offers a willing buyer, with detailed knowledge of the business and its culture.
Following a number of years of low activity in the UK MBO market, 2017 has started strongly. Buy-out value in the first quarter of 2017 was £5.9 billion compared with £2 billion in the final quarter of 2016.
The increased availability of MBO finance has been critical in releasing the latent demand among management teams who are willing to take on the risks and the rewards that a transition from employees to business owners brings. With their knowledge of the business, a MBO is often less risky for the team than the alternative of starting a new company that typically will take time and resources to build the necessary infrastructure and reputation to compete in the market.
Whilst MBOs are similar to other acquisitions in legal terms, the nature of the MBO means that the buyer will already have a detailed working knowledge of the business such that the due diligence process may be more limited. This can help expedite what can otherwise be a lengthy process particularly as finding an alternative buyer may be difficult. The seller can also benefit from disposing the business to a trusted source.
Financing a MBO will be a key challenge, and rarely will a management team have adequate resources to complete the acquisition themselves. An element of bank financing will frequently be available, but given the risk profile of a MBO investment and typically a shortfall in collateral, management teams should expect to be asked to invest an amount of their own money. From the bank’s perspective, investment by the MBO team will help reduce the risk of the transaction. It shows commitment by the MBO team, and ensures that management have further incentive to make the buyout successful.
If available bank funding is insufficient, Venture Capital (VC) or Private Equity (PE) investors may invest money in return for a proportion of the shares in the company. These investors will also typically insist that the management team invest their own money to ensure that they have a vested interest in the company’s performance. Typically VC or PE investors will also want some form of control over the business, whether it is a seat on the Board or regular performance updates.
MBO processes can be time consuming, and management teams will still be required to manage the business during negotiations. Those teams considering an MBO should seek expert advice from an experienced financial advisor to guide them through the process and improve the chances of a successful transaction.