Management Buy-In – Essential guide

Change in ownership can be a natural part of a company’s growth or expansion, an owner’s succession plans, or a response to changes in the performance and needs of the business.

Two popular strategies for changing ownership are Management Buy-Ins (MBIs) and Management Buyouts (MBOs). These sound similar but are very different exit strategies with key differences.

MBI vs MBO – In brief

• A Management Buy-In, or MBI, sees an external leadership team acquire a significant stake in the company from its existing owners. This may be a controlling share, but it does not need to be.
• A Management Buyout happens when a company’s existing management team “buys out” the existing ownership, effectively taking over ownership and leadership of the company. Again, this can be full or partial ownership.

In this article, we look more at the Management Buy-In strategy. You can read our detailed guide for more information on a Management Buyout.

What are the main advantages of a Management Buy-in?

For the business

• An MBI brings fresh eyes and expertise to business strategy. This can revitalise a stagnant business or help raise an already thriving business to the next level.
• The new management team having a direct stake in the company’s success is an incentive to work harder and make better decisions, leading to overall improvements in performance.
• The incoming owners may bring additional capital to the business, helping fund future growth and development.

For the seller

• An MBI usually requires less due diligence and negotiation than a trade sale. This can lead to a quicker and smoother sale and transition.
• The seller may also benefit from greater flexibility in structuring the deal, including earn-out arrangements or ongoing involvement in the business post-sale.

For the acquiring party

• The acquiring party can take over a business with established operations, an existing customer base and a market presence, providing a good foundation for growth rather than starting from scratch. This is, however, dependent on proper due diligence.
• A Management Buy-in removes many of the risks associated with a start-up and can be viewed as a less risky investment by lenders when seeking funding.

Disadvantages of a Management Buy-in

• The introduction of a new leadership team from outside the business can lead to integration issues between them and the existing employees. Managing and mitigating potential culture clashes as part of acquisition planning is important.
• The new management may lack familiarity with the business, its industry, or specific nuances of its work, resulting in potential inefficiencies early on in the relationship.
• Depending on the financial position and track record of the acquiring party, as well as the condition of the business, securing funding for an MBI may be challenging.

What is a typical Management Buy-in process?

Every transaction is different, and a Management Buy-in process will inevitably vary depending on the business and the circumstances of all parties involved. However, most transactions can expect to include some critical steps in the MBI process.

1.     Identification of opportunity

From the buyer’s perspective, the external management team must first identify the target business they believe is a suitable acquisition candidate. For the seller, this stage will involve searching for potential buyers. An MBI process can begin with initial action from either party.

2.    Due diligence

The acquiring management team must carry out thorough due diligence to identify any risks or potential issues with the acquisition. This includes examining the company's finances, legal status and operational condition. This step is essential for establishing a fair valuation for the business.

3.    Forming the Management Buy-in team

If the acquiring party consists of more than one person, it is important for clear roles and responsibilities to be determined and formalised. They must also assemble the right team of advisors, including Corporate Finance specialists and legal professionals.

4.    Negotiating terms

The Management Buy-In team and the existing owners must negotiate the terms of the acquisition, including the sale price, structure of payments, and arrangements relating to the future role of the seller in the business (if any).

5.    Funding arrangements for an MBI

The acquiring team must usually secure funding for a Management Buy-in to proceed. Typically, this funding will involve equity investment from the team and financing from banks or other lenders, often a combination of both.

6.    Legal and regulatory obligations

Once the terms of the acquisition have been agreed upon, legal documentation, including share purchase agreements and ancillary documents, will be drafted. Any regulatory approvals necessary for the change in ownership will also be sought. These regulations will depend on the jurisdiction and industry of the company.

7.    Communication with employees

The outgoing management team must communicate the impending change clearly with the team. This is important for addressing any concerns and questions before the transaction is finalised.

8.    Completion of transaction

When all other requirements have been met, the transaction can be finalised, including payment of the agreed-upon purchase price and transfer of ownership to the new management team. From here, the new team will generally take over the day-to-day business management and begin implementing changes.

If you are part of a group looking to acquire a business via a Management Buy-in route, or if you are a business owner planning their exit and would like to understand the options available, we invite you to contact our dedicated Corporate Finance team for advice.