As a managing director of a profitable business, a management buyout can be an attractive option for both the sellers/current owners and the management team - provided the right conditions are in place and a sound process is followed.
Whatever your reasons for selling a business, be it financial difficulties or more personal reasons, offering a buyout to your management team is a fantastic opportunity to ensure that the company you’ve worked hard for can continue in good hands without you at the helm.
There are several different ways to handle a management buyout and how to instigate this delicate process. However, the financial aspect will need to be considered very carefully from the buyers’ perspective and the lenders.
Incentives to do an MBO
For many, the incentive to sell their business is both personal and practical. If a management team is interested in buying the business, there could be a few reasons behind the choice as well.
Retirement is one of the most popular reasons, especially if the company is doing well, but equally breaking up a larger business into smaller subsidiaries gives a great opportunity to buy in and have a bigger stake.
From a financial stance, buying into a business to save it would require the buyers to demonstrate a solid recovery plan to save the failing company. While this isn’t a popular reason for buying the business out, it can be done, and there have been some high-profile cases of management teams doing just that.
From the seller’s perspective, there are benefits of doing a management buyout (MBO) instead of a management buy-in (MBI), which would mean outside owners buying the business instead of selling the company to people who are already in the business.
Doing an MBO means being sure that you’re selling your business to people who already know the industry, are personally invested in the success, and likely people you already know well. Many owners have an exit plan that may be a year, three years, or even five years down the line to ensure a smooth transition to the new owners to allow the business to thrive.
How does a Management Buyout Work?
Every management buyout process is different, there are a few steps that are fairly universal to every business. These include:
- Building credibility with the current owner who may or may not wish to sell the business
- Identifying a buyout opportunity
- Assess and plan
- Raise finances
- Complete the necessary paperwork
- Become the new owners
Every business buyout will go through the above steps in one way or another, and depending on the sale terms and the relationship with the current owner, this process can either be very smooth or very challenging.
It’s not always necessary for an owner to wish to sell before a management team can approach them about buying. The team may notice a good opportunity and make the owner with a well-planned management buyout structure, or a previous management team may suggest a buyout to save a struggling company.
In either option, the question of funding will always be a top priority, and it is likely that any management team will need to show a level of personal commitment to the sale, and this is likely to be putting up personal capital to buy the business, as well as convincing lenders that this is a good bet.
Protecting an MBO From Going Wrong
Try as hard as we like, sometimes a management buyout will always be stressful and risky, even if all parties are fully in agreement and want to get it done as quickly and as smoothly as possible.
However, there are ways to mitigate this risk, and it’s worth investing in some expert help on both sides.
For a management team, due diligence and having a clear and structured plan is vital. Checking all of the paperwork thoroughly to ensure nothing has been missed will protect your personal investment as you advance. Meanwhile, planning a realistic time frame for that to happen will reduce stress to a more manageable level.
Funding an MBO
When it comes to funding an MBO, many lenders will need assurances that the plan is likely to work before considering which type of help can be made available.
Any potential buyers, whether this is the current management team or a previous management team, will need to show a well-written business plan and sensible terms of sale from the current owner. The management buyout process goes a lot smoother when everyone is on board, and strong leadership is shown all around.
TSF Finance can help with planning your finances for management buyout by offering several different finance packages such as business loans and asset loans. Our expert team will work with you to ensure that financially it is a strong deal and help move you towards a successful management buyout.