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Management Buy Outs can be a win-win solution for shareholders and management teams alike.

For an owner that wants to retire and cash out, an MBO gives them peace of mind that they are passing the company along to a group that they know and trust. This can be particularly important for a family business or a company that employs a large number of people in a small town – a company’s legacy can be of utmost importance.

What exactly is a Management Buy Out (MBO)?

In its simplest form a management buy-out (MBO) is a transaction in which the management team pools resources to acquire all or part of the business they manage. It allows the shareholders or owners of a company sell their business to the existing management team and realise value in their ownership of a business. Additionally, it provides management with an opportunity to benefit fully from profits generated post-deal. 

How can a MBO be completed, structured, and funded?

There are many ways to fund and execute a MBO. Illustrative sources of funds include debt, private equity or deferred consideration. Typically, management is also expected to contribute equity so the other funders in the deal are comfortable the team is appropriately incentivised for the transaction to be a success for all parties.

There is a spectrum of options as to how to fund a deal, ranging from the “Classic” MBO (Debt + Deferred + Management Equity), all the way towards a Private Equity sponsored transaction (many PE funds seek to invest in businesses worth €20m or more).

The simplified steps to executing a MBO are:

  1. Agree a valuation: Find agreement between the (selling) shareholders and the (buying) Management team on the price to be paid for the business.
  2. Define the funding structure: Decide the form of funding that will support the buyout (i.e. the quantum of debt & equity required, the level of any deferred consideration & timing of same etc.).
  3. Negotiate heads of terms: Formalise the dialogue by defining all key commercial, financial & legal points in a non-binding heads of terms that provides the Management team with a period of exclusivity to complete the deal as agreed.
  4. Raise the funds: Engage with bankers, equity investors & the exiting shareholders to ensure the debt, equity & deferred consideration components to fund the deal are available in the appropriate timeframes (before commencing diligence).
  5. Complete & sign legal documentation: Appoint lawyers to effect the deal in order to make it legally binding. 

What are the benefits of a pursuing a Management Buy Out?

MBOs can address the need to transfer wealth from one generation to the next in circumstances where there has already been an unsuccessful attempt to sell the business. For example, there may be a limited number of buyers due to the scale of the business or, alternatively, an existing shareholder is seen as a key executive in the company. By securing the buy-in of the management team, the existing owners of the business can convert the value of these shares into cash – be that for lifestyle, investment, retirement, or succession purposes.

The management buyout process also has tactical advantages for the seller. Doing a deal with company management can be a more discreet way of realising value. MBOs typically avoid the marketing process that comes with selling a business and, as such, reduces the risk to the owner of confidential information being disclosed during the sale process. Additionally, the closing process can be quicker since the buyer, who has been managing the company, knows the asset well

For management, a MBO allows the team to benefit more fully from the dividends and profits generated by management going forward, as well as providing the team with the opportunity to have more autonomy and input into the strategy of the business. Management may also wish to take the business in a different strategic direction post-MBO, with a view to selling it at a higher price in future.

Another attractive feature of a MBO is it can provide the absolute minimal amount of disruption possible for other stakeholders in the business, including both customers & employees. 

For confident management teams, an MBO is often the easiest, quickest, and least risky way to take a meaningful ownership stake in a business. In an MBO, the buyers (i.e. management) are already highly familiar with the asset business they are buying; this should considerably reduce the risk of the investment.

Other stakeholders can also benefit, not just the buyer and sellers. For example, lenders, customers, suppliers, and employees can all benefit from an MBO because the existing management team is staying in place. This provides reassurance that the company’s operations and service will be remain consistent.

How long will it take and who is typically involved?

Transactions of this nature take time. A reasonable rule of thumb is six months, although this can be shorter or longer depending on the specific dynamics of each deal. In certain cases, however, MBOs can be executed more rapidly given Management knows the business well – therefore reducing the need for diligence.

Advisors are often involved in helping both sides execute a MBO. Advisors can provide the “distance from the deal” which is important in any transaction, but particularly vital where both sides (i.e. the shareholders & managers) know each other well over for a long period of time. Advisors bring credibility, independence, solutions and, importantly, the level of ownership on the deal necessary to ensure the transaction completes in a timely fashion. 

When is the optimal time to consider a MBO?

From the selling shareholders’ perspective, the typical triggers for pursuing a MBO are an upcoming retirement or the need for a succession solution to transfer wealth to the next generation. Occasionally MBOs are also pursued when a long-time Executive Shareholder cannot sell the business on the open market, perhaps due to perceived key-person risk or the scale of the business is too small to run a competitive sale process.

For the management team, often the opportunity arises when the factors outlined above are at play. Whilst is possible to be more proactive and state your intentions to acquire the business, clearly this must be communicated in the optimal fashion and not jeopardise your employment position. The most important reason for Management teams to pursue MBOs is the desire for more of the upside – i.e. the ability to participate in & benefit from the profitability of the company, which is often the result of Management’s efforts anyway.  

Does the COVID-19 pandemic change anything?

Deals continue to complete since the pandemic started and we are advising on a healthy pipeline of MBOs. Clearly doing deals in this environment brings certain considerations & many steps in the process are executed on virtual platforms such as Teams & Zoom – but there is nothing fundamentally affecting the appetite for MBOs. In certain cases, in fact, the pandemic has actually increased the appetite to sell as shareholders realise the operational environment may be challenging for the next 2-3 years and, as a result, their plans to retire are accelerated.

Get in touch

Are you involved in, or considering, a management buyout? We can help. Contact Niall Flood of our Corporate Finance practice for further information.

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