The Advantages & Disadvantages of a Management Buy Out

When a business owner is looking to move on, whether this is retiring or a new venture, they will want to find a buyer for the business. They can find someone externally, but often a management buy out (MBO) is the best solution and can bring many advantages. Essentially, this involves the management team buying the company to keep the sale internal.

How Does an MBO Work?

Any kind of sale can be complex, including an MBO. Typically, these deals are formed by shaping the deal and coming up with a business valuation, agreeing on the deal between all parties and then management securing funding for the deal to be completed. The final phase is driving completion, which involves facilitating the handover and making sure that the transaction is processed legally. Often, it is helpful to seek support from management buy out experts that will make the entire process easier for all.

Advantages of an MBO

The key advantage of an MBO is that the sale will be completed internally. This means that you do not have to spend time finding an external buyer, management will know how the business operates and you also do not risk disclosing sensitive information to external parties (competitors). An MBO is often a quick and easy process with little disruption, plus there is a higher level of trust as the current owners know that they are leaving the business in safe hands which is often extremely important to the owners/founders as they have spent many years building the business up and got it to where it is today. They will have strong emotional ties to the business and will want to leave it in capable and knowledgeable hands.

Disadvantages of an MBO

There are a few drawbacks to consider with an MBO. First, you will find that you will usually lose out on money compared to selling the business on the open market. In addition to this, the process of an MBO can sometimes cause disruption to management’s work and interfere with the business in the short term. Additionally, it can be a step up from management and not everyone has the skills to succeed at a leadership level. This is why it is so important to make sure that the management team know how to own a business and have the required skill set and confidence levels. MBO’S require specialist knowledge in the structuring and financing to maximise the financial benefits and minimise potential risk factors. A finance team with MBO experience will know of all the common pitfalls and will have specialist colleagues in other areas to help with these potential dangers.

Funding an MBO

It’s not often that a management team will have the required funds on their own to purchase the company, and so finance is often required to help fund the process. Typical sources of finance include Asset finance which is where the business uses assets to leverage against the company. High street and private debt, which is where a bank will consider providing a cash flow term loan. Paid over 3-5 years. Private equity or vendor loan notes.  

When the time comes to sell the business, it is always worth considering an MBO. If the management team are ready to step up, there are a number of key benefits to a management buy out and it is often the best option for the business. There are also a few drawbacks and key considerations with this type of sale, though, so this post should help to determine if it is right for you and the business. You should consider your funding options in order to fund your MBO.