For business owners, choosing and planning for an appropriate business exit requires significant deliberation and takes time. For owners who value continuity and where a third-party sale might be difficult to secure, MBOs are an attractive option.
Sale via a Management Buyout (MBO) can be a lengthy and complicated process, and it is important that you seek out an experienced advisor to help you through step by step. At Bevan Buckland we have advised on a number of MBO transactions. Alison Vickers, Managing Partner at Bevan Buckland LLP, provides an introduction to the MBO process.
Why choose a Management Buy Out (MBO)?
MBOs can be an attractive exit route for SME owners looking to sell their businesses or, more commonly, retire. They are particularly suitable for niche or bespoke businesses where a third-party sale or finding a trade buyer can be difficult.
An MBO is a suitable route for many as it allows existing management to take ownership of a company they know well and gives the business a high level of continuity.
What are the different types of MBO?
There are a few different types of MBOs to consider.
Traditional MBOs are where the owner completely exits the business with a sale to the existing management team. This option is viable when a strong management team with the relevant experience, knowledge, and skill set to lead the business is in place.
Where the existing management team has a lot of strengths but might need more specific expertise, there is the option of a Management Buy In (MBI). This can be either when an individual or a new group joins the business to form a new management team to buy the business. Both MBOs and MBIs lead to a complete sale of the business to a new management team.
We also deal with Vendor Initiated Management Buy Out (VIMBO). This is where a new management team is installed, but the previous owner retains some stake in the business and can remain as part of the management team.
In this instance, there still has to be a material change in the control of the business to clear HMRC hurdles.
How long does the MBO process take?
The length of the process can vary, but typically, the formal process takes between 6 and 12 months. However, businesses need to take their time to prepare before the formal sale. All in the process can take between two and three years to complete.
What are the key considerations when first thinking about an MBO?
There are two important initial considerations: preparing the management team and ensuring you have the right people and skills and a clear succession plan for the Managing Director/ CEO role. If there isn’t a management team in place to take on the business, then recruiting the right people could be the first stage.
Secondly, it is important to sit down with a suitably experienced accountant and understand the financial strengths and weaknesses of the business to agree on a realistic expectation of the business’ value.
Finally, it is important to understand the nature of the transaction and what assets will form part of the goodwill valuation. A business is usually sold cash free, debt free with a level of working capital forming part of the goodwill figure agreed. Therefore, a key aspect to any sale is to manage these balance sheet items prior to selling.
What are the benefits of an MBO?
An MBO can provide owners with the only realistic exit route if there is no alternative to achieve a complete sale. However, other key benefits are that it allows for continuity, stability, and certainty to staff and customers. The owner can also retain more input into the future of the business, and it can be a motivating factor in helping to retain key staff.
What are the downsides of an MBO?
Owners should be realistic about the MBO valuation that a business can support; a third-party sale could achieve a higher exit price and be more lucrative. With MBOs, the owner might get only some of the sale proceeds upfront.
What are the funding alternatives for MBOs?
Funding options mainly depend on the asset strength of the business. Funding can range from traditional secured loans to invoice financing and usually contain an element of equity, especially if the value of the business is mostly goodwill. There are many cases, owners may self-fund part of the sale through loan notes and earn an additional return.
Having worked on a number of MBO deals, what are the key things you have learnt?
It is important to go through the process step by step, so you need a suitably experienced accountant and a corporate lawyer who understands the process and pitfalls, can guide you through it, and can give you strong, pragmatic advice.
You must have an advisor who understands the valuation process and the funding alternatives and can take you through the process in a way that doesn’t commit you to anything you can’t reverse out of.
If the current owner is still heavily involved in the day-to-day running of the business, it is vitally important to ensure you have the right person in place to take over the leadership role and have time to mentor and prepare that person for a successful transition.
Try to plan in advance, managing cashflow, debt and working capital can benefit the ultimate sales value.
How can Bevan Buckland help clients?
We understand how profitability, balance sheet strength, working capital requirements, surplus cash, debt, provisions and liabilities and other problems can directly impact the MBO process. We can help you plan and prepare to maximise the potential value of your business and support you through the transition process to complete your MBO sale successfully.
If you had to summarise the MBO process quickly:
1. Speak to a suitably qualified accountant to understand how the process works and how to value your business
2. Identify the future management team and ensure you have the right people in place – who will be the CEO
3. Plan any exit as early as you can, this is important when looking at the surplus cash, debt and working capital.
4. Engage the team to mentor and prepare them and involve them in the process
5. Strengthen the business’ financial position and complete the business plans to both support the valuation and secure the best funding alternatives
6. Engage a corporate lawyer with MBO experience
7. Understand the funding options and know your financial forecasts
8. Complete due diligence
9. Complete the deal and transition
10. Accept that you will not get all your money out on Day 1
If you wish to have a confidential discussion to discuss your requirements, please get in touch with our team on 01792 410100 or email us.