Considering a Management Buyout (MBO)?
– Part 1 of a 5 Part Series on MBOs

 

Then you have probably asked yourself one or more of the following questions:

• I’ve heard the term MBO but what exactly does one involve?
• Is an MBO an option for me?
• How do I bring up the subject with my employers or employees?
• Is my management team strong enough?
• Should each member of the management team invest equally?
• I don’t have the cash so how do I find outside financing?
• How much will I be expected to put up myself?
• How do I value my business?
• What are the roles of the bank, private equity firm and management team?
• How do all of the players make returns?
• How do I prepare a suitable business plan?
• What is the role of the corporate finance consultant?
• What other consultants are involved and what will it all cost?
• How long does the process take?

Do not be put off by the size or type of business you work in or the sector in which it operates.  It is worth exploring every opportunity.   For instance, with family firms there is often an assumption that it will be passed on to the family but this is not always the case.  There is also no reason why an MBO structuring can’t work in the case of a multinational entity seeking to exit a particular market.  Proper planning, enough time, and foresight are allies to making just about any envisioned deal become a success for every party involved.  From just about every angle, MBOs are an ideal opportunity for managers to satisfy their entrepreneurial aspirations.  They are a chance to acquire a significant equity stake in their own company.  This is a desire many have but only a few ever act upon.  Doubts and fear can stymie very achievable dreams.

 What is a Management Buyout (MBO)?

A management buy-out, or MBO, is the acquisition of a business by its existing management team from its existing owner, usually with the help of external financing.  A common motivation for the management team is the opportunity to turn their company into a profitable endeavor rather than just a bi-monthly paycheck and hopefully a Christmas bonus each year. MBOs make managers owners. MBOs help them finally realize capital gains and truly and fairly profit from the fruits of their labor.

The window of opportunity for an MBO will not present itself very often. You may be fortunate enough to be approached by the owner. This is not often the case however, so you should be on alert for signs that the owner may be intending to sell. In a privately owned business this may be as simple as:

• A lack of family succession/the owner wants to retire
• Shareholders want to de-risk by realizing cash
• Shareholders want to exit
• An institutional owner may wish to realize its investment
• A private equity firm may wish to realize its investment

If your company forms part of a group/division/subsidiary, you should consider the wider group strategy to determine the future of your business.  Key indicators include:

• A change in strategic direction which makes the activities of your business non-core
• Operational, manufacturing or development bottlenecks due to lack of investment
• Liquidity problems within the parent company

Once you have a feeling that now is the right time, you should carefully consider your approach.  This is a key stage in the process where planning and timing are critical. The way the process is handled will depend very much upon your relationship with the current owner.  As a first step, you should seek permission from the owner to consider an MBO.  It is particularly important to judge the current owner’s willingness to sell and any particular sensitivities before making an approach.  An MBO can be viewed by some owners as a sign of disloyalty and could jeopardize your working relationship going forward.  Alternatively, if you are an owner and looking to engage your employees as prospective buyers of your business then careful consideration should be made as to which employee(s) would be best suited for leading the company going forward.

You will often only get one opportunity – so you should seek professional advice before entering into detailed dialogue with the current owner or your employees.