HOW TO EXECUTE A SUCCESSFUL MANAGEMENT BUYOUT

A successful management buyout requires an adequate strategic assessment and a financing structure that will ensure the company’s sustainability.

If you’re an owner looking to sell your business or an employee thinking about buying the company you work for, you should be familiar with the term management buyout (MBO).

In addition to having a good chance of being successful, this type of transaction can often be achieved by minimizing the impact typically associated with an ownership transition and leadership succession.

However, you must prepare well if you want to maximize your chances of a smooth transfer of leadership and ownership.

What is a Management Buyout?

In its simplest form, a management buy out is a transaction in which the management team pools resources to acquire all or part of the business they are already leading and managing.

Most of the time, the management team takes full operational control and full or partial ownership, using their expertise to then continue to grow the business. Financing usually comes from a mix of personal resources, lenders and outside investors, including the seller’s resources.

It’s important to differentiate between the succession of operational responsibilities and the transfer of ownership. The first is usually gradual, over several years, and transparent, first to employees and then to external stakeholders such as customers, suppliers, and financial partners, who will then not be surprised when the actual ownership transaction and management buyout is signed and finalized.

The risk is reduced to all stakeholders because the continuity of business operations is better ensured when the people who lead and manage the company are the ones who decide to buy it. Because the buyers are an experienced management team that is already familiar with the business and its needs, the stakeholders (existing customers, suppliers, business partners and especially employees) often feel reassured.

What are the Advantages of a Management Buyout?

History, experience, and data clearly indicate that the success rate of a management buyout is higher than that of a third-party acquisition. The transition is usually much smoother when the buyers are already part of the company and are familiar with it than when they come from outside. It’s not uncommon for the announcement of the company’s management buyout to be a welcome relief to all stakeholders. 

What is involved in a Management buyout?

After you have appointed corporate finance, mergers and acquisition professionals to facilitate and aid you through your transaction. A series of common steps are usually followed to ensure a transition from a current ownership. Strategically minded corporate finance, mergers and acquisition professionals exist to aid you through the transaction process and to ensure:

A. The right people are in place to lead and participate in buying your business.

Properly selecting from among the current leadership team who will become co-shareholders of the business is a critical step in the buyout process. They all must be entrepreneurially minded. You will also need to find a leader from among the members of the multifunctional group to act as future president.

B. The transfer knowledge and responsibilities are well underway.

One of the most critical steps in a management buyout is the transfer of knowledge and responsibilities. This often takes a few years ahead of the transaction. But afterwards, when the transaction is announced, the various stakeholders are generally not adversely impacted because they’re already working with the leadership team.

C. An independent business valuation validates all parties’ price expectations.

The benefit of the appointment of corporate finance, mergers and acquisition professionals is they will perform a business valuation free of emotions and perceptions that can hinder a potential transaction.

D. Funding the transaction is in place.

Various options will be explored by corporate finance, mergers and acquisition professionals and considered in finding a way to fund your transaction.

Here are various types of basic financing that can be combined to ensure a successful transfer.

1. Leadership and management personal funds; Personal funds are used to secure the confidence of a financial institution, add equity to a transaction, and share risk. New leadership often invest a significant amount of their own personal wealth as a way of demonstrating their commitment.
2. Asset-based financing; The company’s assets, such as buildings and equipment, may be used as collateral to borrow money to finance the transaction.
3. Cash flow financing; The company’s ability to repay—its normal profits—is also used to repay any debt..
4. Mezzanine financing; This type of financing allows the loan to be repaid based on the company’s performance to consider the upheaval that might follow the ownership transfer.
5. Seller equity financing; This type of financing bridges the gap between the financing capacity and the agreed-upon price, spreads payments over several years, and has the seller share the financing risk, which is well perceived by all stakeholders in such a transaction. If both parties do not agree on the cash at close, a contingent consideration clause (earnout) is often structured, which is payable based on the company’s performance.
6. Sale of shares to employees; Middle managers might be asked to take a small equity position in the company, for example, or all employees may be allowed to buy shares in the company. In addition to helping with financing, this strategy acts as a productivity incentive for employees.
7. Sale of equity to financial or strategic investors; Depending on the size of the transaction and the extent of available leverage, another option is to partner up with family offices or private equity funds, who should contribute more than money through their advice, networks, and experience.

Conclusion

Selling a business for most owners is an event that happens only once in their career, it is therefore important to learn and understand all the information in this article. Furthermore,  reach out directly to the author to learn more about the many nuances that this article is simply too short to convey and that might make or break the successful profitable sale of your business to your management team.

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