Management Buyout: what it means and the process, simply explained

August 8, 2020

Management Buyout: what it means and the process, simply explained

You may have heard the term ‘management buyout’ (or MBO) before, but what exactly does it mean?

If you are considering selling your business a management buyout may be an option that you are considering. 

In this piece, we will break down the ins and outs of what a management buyout is, how it works, and the pros and cons of an MBO.

What is a management buyout in business?

Put simply, a management buyout is when the current management team of a business comes together to buy out all or a part of the business. 

It can commonly happen if the business is in danger of shutting down, so the management team invests in the business to prevent this and take control from the current owner. 

This process may also be done to break an arm of the business away from the core business - or even make a company private when it was previously publicly-traded.

A management buyout can be very rewarding for the management team as they will receive more financial rewards than they would typically receive through the traditional salary and bonuses. MBO’s are a chance for management teams to invest in themselves and the business and be rewarded for all of their hard work.

Management buy-out advantages and disadvantages

There are many pros and cons to management buyouts, so before you consider this for your business it is important to weigh these up and decide for yourself whether it is worth putting your time into. 

Let’s start with the advantages:

  • Smooth transition process: it goes without saying that the management team already has in-depth knowledge of the business, so this saves time that would be taken up by a new owner who would need to invest a lot of time and energy into learning about the business.

  • Keeping clients: naturally, the management team will have developed relationships with important clients that are key to business growth. Keeping these relationships strong moving forward is vital during the transition process.

  • Confidentiality: as the selling process is internal, you can rest assured with the knowledge that news of your business being sold stays within the business and avoids any internal changes and vendor switchovers being out to the public.

  • Peace of mind: the very fact that the business is being bought out by a group that the owner knows and trusts means there are fewer worries in the long run.

  • Quicker closing process: the management team knows the asset well, meaning the process will be faster than selling to a third party.

Of course, as with most important decisions, there are also potential complications and factors to bear in mind. Let’s dive into disadvantages:

  • Funding: buying all or part of a business can be costly, which can limit the management team from personally funding the buyout. This may mean that other sources of business funding need to be considered, which can include private equity, vendor loan notes and asset finance. Understanding each of these and their implications can be quite time consuming and stressful without industry know-how, and the team could potentially end up financing the deal with too much debt. With this in mind, an experienced business finance broker such as Hilton Smythe Finance can support this.

  • Lack of experience: yes, the management team knows the current business inside and out, but for many, this will be their first time owning an asset - there is quite a big difference between managing and owning!

  • Lack of direction: with a management buyout it is absolutely key that everyone has the same idea about the direction the business is heading in and the next steps to take. Not consolidating this before a management buyout can lead to issues in the long run and in worst-case scenarios, even legal disputes, although this is a very rare occurrence.

  • More complicated than meets the eye: when you really delve into the ins and outs of a management buyout, the process can be more complex than initially thought - yes, the idea seems attractive to a management team who are already mentally invested in the business, but financially? That’s an entirely different ballgame and can take a lot of time to gain a deep level of understanding of how the process would work as each case is different. Using an experienced business broker can help with this.

  • An external buyer can bring new ideas to the table and take your business in a new and fresh direction than a current management team would. 

  • Ultimately, a management buyout may not be the best or only option for you to consider, depending upon your business, industry and circumstances. Need to sell your business but not sure how, or what options are available? Speak to one of our expert team members today.

How does a management buy-out work?

The management buyout process works as follows:

  1. A sale price is agreed between the seller and the management team. Getting a business valuation is an important step to understanding how much your business is worth - as much as you love your management team, you don’t want to be underselling!

  1. Risk factors and opportunities for growth are evaluated between the management team

  1. The team review their finances and what will be possible with the amount they can invest

  1. Finances are assessed and a predicted financial model is created to show how debt will be mitigated and how investors will make money back 

  1. A new business plan is created with plans for how to move the business forward

  1. Terms of sale are negotiated and agreed with the seller

  1. Finance is raised between the management team

  1. Due diligence is performed to ensure all the information given to the management team stacks up and is in order

  1. The deal is closed and the management team are now the owners!

How long does a management buyout take?

The management buyout process usually takes six months, typically the same as selling to a third party. During this time it is essential that the business continues to operate as normal while the changes are taking place to avoid any potential issues further down the line.

What is the difference between a management buyout and a management led buyout?

It is commonly thought that a management led buyout is different to a management buyout, but it is in fact the same thing - it is just referred to slightly differently by different people.

What is the difference between an MBO and an MBI?

Both an MBO (management buy-out) and an MBI (management buy-in) involve all or part of a business being bought by a management team - the difference is that with a buy-in, an external team are buying into the business, whereas with an MBO the management team already exists within the company.

What is the difference between an MBO and an LBO?

A managed buy-out, as we’ve explained, is where an existing management team buys all or part of the business. A leveraged buyout is where a company is purchased with a large amount of borrowed money. The cash flow of the company being acquired is often used as collateral (‘security’) for the loans and is also used to repay the amount borrowed. 

Therefore, an LBO is a way of securing an MBO when the management team wants to buy the business but do not have the funds personally.

In conclusion…

A management buyout can be a very attractive offer to a management team who have the means to finance and strategically manage a business. An MBO can be very rewarding and ensure a smooth transition from seller to buyer.

At Hilton Smythe, we are experienced business brokers who can help you understand your business value, sale options and assist with the management buyout process. Get in touch today to find out how we can help you.