I Want To Sell My Business Via A Management Buy-Out (MBO)

I Want To Sell My Business To My Management Team

Traditionally it is well documented that less than one in five business owners would consider selling their businesses to their management team.  The reasons are obvious – Management Buy Outs (MBO’s) need careful thought and planning.  However since 2008 and the impact on appetite and demand in the Mergers & Acquisitions sector as a whole, the perception of MBO’s have begun to change and they have become more popular with a number of key advantages.  As a Business Owner, do the benefits of an MBO outweigh the potential risks?

Advantages Of An MBO

So what are the advantages of an MBO?  Rather than have to go to the market place, the Buyer has instantly been found, and the Vendor will be confident that they have the same business ethics and ethos to ensure client relationships are preserved and the name of the Company and legacy is maintained.  Also one of the main advantages is that confidentiality can easily be contained in-house, removing the risk of competitors finding out that the Company is on the general market and any detriment affect from this relating to clients or staff.  MBO’s allow Vendors to be more comfortable about structuring a deal over a longer period of time than they would do with an unknown 3rd party, ensuring there is minimal disruption.  The risk involved in the change of power can therefore be minimised.

Disadvantages Of An MBO

As with everything in business there is another side to the argument, with the main case against MBO’s being that as the Vendor you are limiting the competitive number of Buyers to just one!  A Company being marketed for sale in the open market could easily generate 8-10 potential purchasers, where an offer price could be significantly higher due to synergetic or competitive reasons.  Funding is also a common problem with MBO’s and can be the main cause for the deal to fail, whereas Buyers generated from open marketing would need to provide proof of funding, normally before serious negotiations even get started.  Often Vendors find themselves having to agree to a lower value deal with the MBO team than the Company is actually worth, due to this being the maximum amount they can raise.  Also a point for note is should discussions get underway for an MBO then there could be the risk of the management team not keeping their eye on the ball and the Company’s current performance could begin to suffer.  Alternatively, and even more or a concern to a Vendor, is that should the sale fall through, the Company would be left with a severely demotivated management team.  If the Vendor then looks to take the Company to the general market this instability would devalue the Company accordingly.

The Key to Success

The starting point is to ascertain whether or not the management team will have the appetite, ambition and leadership capability to grow the business, followed by access to finance, as this is the critical part! Anyone thinking "I want to sell my business," should seek specialist help and advice to ensure that a succession plan is carefully implemented so that a flexible, staged exit can be managed, ensuring that sensitive issues and individual aspirations can be dealt with. Working alongside experts in this field can ensure that the business is made as attractive as possible in order to achieve the necessary finance and of course, allowing the Vendor to achieve the full value of their Company!

Adam Croft, Senior Business Broker

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