A Management Buyout (or MBO) is a business exit strategy in which the company’s own senior management team acquires the controlling stake in the company.
For an exiting business owner, choosing an exit strategy may be a once-in-a-lifetime decision, and it is important for them to understand what options are available and what considerations must be made. These considerations include the future of the business and staff following the owner’s departure, the tax situation for the seller, and the valuation of the shares being sold.
Here we will look in detail at the pros and cons of a Management Buyout (MBO).
Advantages of a Management Buyout
Opportunity for senior management
A Management Buyout presents a significant opportunity for the senior management team of a business. By acquiring a controlling stake in a business, they not only improve their potential future earnings and wealth considerably but are also given the opportunity to guide the business to further success long term.
No need to market the business for sale
When selling a business to a trade buyer, there is a lot of work involved with ensuring the transaction goes ahead. There is still plenty of work required for an MBO; however, unlike a Trade Sale, the exiting owner will not have to go to market to source a suitable third-party buyer.
Full market value of shares (generally)
Subject to negotiation, with an MBO, the exiting owner will generally receive the full market value for their shares.
Fewer potential issues (certainty of exit)
Because it means selling to people within the company, an MBO has a very high chance of being completed without complications or disruptions. With a trade sale, there is initially the challenge of finding an appropriate buyer with the appetite to make the acquisition. A Trade Sale is also dependent on a third-party acquirer who doesn’t know the business and therefore potentially more factors which may delay the closure of the deal, such as legal challenges.
Preserve the legacy of the business
A Management Buyout raises fewer questions about the long-term future of a business. Whereas a Trade Sale to a third-party buyer, such as a competitor, could usher in drastic changes to the way the business operates to both staff and customers, an MBO puts the incumbent senior management team in the position of ownership.
Performance and management continuity
The senior management team of a business will have a strong understanding of a business, its history, customer base, historical performance, culture, and staff. By transferring ownership to those who are running the business day-to-day already, an exiting owner can be more confident that the new owner knows the business inside and out.
Disadvantages of a Management Buyout
Funding and deferred consideration
For most cases, the senior management team will not have sufficient funds personally to hand to meet the valuation of the business. This means that they will need to seek additional funding from a bank or other lender and there will usually also be some element of deferred consideration (i.e., some of the purchase price is paid to the exiting shareholders over a period of time).
The business will usually take on debt
Because a Management Buyout will usually be funded by a combination of borrowing and deferred consideration, the business will be taking on debt. This debt must be taken into consideration by the management team and will impact business cash flow for the repayment period.
Price may be lower than in a Trade Sale
When a business is sold via a Management Buyout, the exiting owner is generally guaranteed the full market value of shares. However, this price may be lower than what a strategic trade buyer may offer.
EOT – A Management Buyout alternative?
The benefits of a Management Buyout are numerous, and for many exiting business owners, it may be the ideal exit strategy. If, however, you are unsure it is the right exit strategy, there are others which may be more suitable.
One of these is the sale of your business to an Employee Ownership Trust (EOT). There are several unique benefits of an EOT, which include the following:
- Zero capital gains tax on business sale
- Succession can be implemented over a period of time
- Tax free bonuses of up to £3,600 for employees
- Receive full market value for shares
Tags: Corporate Finance