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What is a Management Buyout (MBO)?

Management Buyout (MBO) is a process in which a company’s key management team acquires all or part of the company they manage.

The structure and terms of an MBO will often be negotiated with assistance from an Accountant or Corporate Finance Advisor, who may also provide guidance on obtaining the funding. Also, the Vendor (proprietor of the company) may be willing to assist with the funding structure.

Indeed, the Vendor may find an MBO attractive as an alternative to trade sale for various reasons such as; 

  • Vendors may be nervous about approaching competitors and disclosing sensitive information
  •  The number of potential trade buyers may be limited.
  • The Vendor may want to see the future of business and staff remain intact and in safe hands
What is a Management Buyout (MBO)? –SME Capital

Potential issues for management team to consider

There are, of course, many issues to consider. And, although funders will drill down into numbers, products and market dynamics... be assured the cohesion and drive of the management team is an absolutely key element. The team must be “Up for it!!”

So, as long as that is the case: the management team can reap the rewards of ownership making the transition from managerial to entrepreneurial, from being employees to owners.

The hallmarks of a business that would facilitate a successful MBO are:

  • A strong committed management team with a complimentary blend of skills
  • The target company should have a robust track record of profitability and cash generation….and of course good future prospects
  • In all probability the vendor needs to be pragmatic about price and realistic about the need to assist with vendor finance
  • A deal structure that can be funded and supported by the future cash flows of the company.

Typical stages of an MBO (Simplified)

 1

Initial discussions between vendors and MBO team, ensuring both sides fully understand what the other side wants to achieve, with full understanding of current financials and prospects

 2

Involvement of “Advisors” who will assist with 1) Valuations of the business 2) Deal Structure 3) Preparation of forecasts to include affordability of debt

 3

Advisors will consider tax implications, and undertake modelling / sensitivity analysis 

 4

Approach to funders typically through an “Information Memorandum”  followed by subsequent evaluation of offers received

 5

With funders appointed and terms agreed, due diligence would start

 6

Subject to satisfactory due diligence, lawyers instructed, and paperwork drawn up. Any reference to HMRC completed

 7

Completion of transaction – change of ownership takes place

 

Choice of Advisors

Auditors to the company may have a Corporate Finance team / Partner, or may be able to recommend an advisor from a Corporate Finance boutique. Luckily, these firms are growing in number and specialise in transactions such as an MBO. However, still, the Management team will need to work very closely with advisors; so that a plan can be prepared for funders to consider.

Sources of Funding

Realistically, vendors do not expect management teams to have sufficient funds to buy the company, and so a structure is needed to complete the transaction. Typical sources of funding include,

a. High Street Banks / the company’s bankers

Banks will consider providing a cash-flow term loan, repayable over 3-5 years to support an MBO. Similarly, they will also be receptive to funding where Freehold property forms part of the transaction.

b. Asset Finance

Funding which enables businesses to borrow against the current assets in the company; typically debtors (or stock) is common in MBO structures

c. Specialist Alternative Lenders

Specialist alternative lenders have become far more active in the market in recent years; and although more expensive than High Street banks; can bridge the gap and make a deal possible.

d. Vendor Assistance

Many deals can only be completed with some support from the vendor; this may be deferred consideration .

e. Private Equity

For larger deals, PE funds will support good management teams. Here, if underlying and future profitability is good, and the business is strong, then funding an MBO using Private Equity is a possibility. 

Summary

In summary, an MBO is a journey. A journey which for many leads to exciting and rich rewards, but which can be challenging at every step of the way.

 

keith-haywood-sm

Author: Keith Haywood

February 2022

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