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More and more shareholders are turning to management buyouts (MBO) as the best option to sell their business. An MBO, where shareholders of a company sell the business to the existing management team, is often a win-win scenario for both buyers and sellers alike for a variety of reasons.

“It is often the case with family or private businesses that the next generation has no interest in taking it on when the time comes to retire,” explains Niall Flood, Director in KPMG Corporate Finance. “A management buyout allows the owners of a business to realise the value of the company with minimal disruption. It also avoids the necessity of putting the business on the market and searching for buyers in the public eye. That reduces the issues that may arise with stakeholders such as suppliers, customers & employees when pursing a normal sales process.”

Buyout rewards

For management, an MBO allows the management team to benefit fully from the future profits generated by the business. This can be much more rewarding than simply working for a salary and other nominal benefits.

Financial reward is just one of the attractions, however. “Owning the business typically empowers the management team and provides it with increased autonomy to decide the strategy of the business”, Flood explains. “For example, management may have new ideas and may wish to take the business in a different strategic direction. Indeed, they may plan to take it on a more aggressive growth path with a view to selling it at a higher price in future.”

Speed of execution & cheap financing costs are other attractions. Interest rates are currently at historic lows and this helps management teams finance the deal via debt & thereby secure an exit for existing shareholders.

The only option?

In certain cases, an MBO may also be the only viable option for owners who wish to sell their business. “COVID-19 and Brexit drives uncertainty and this tends to reduce buyer appetite and indeed M&A transactions generally. The number of trade buyers for particular types of businesses may be limited as a result, particularly if there is dependence on key persons within the management team or if the business is sub-scale” says Flood.

Like any other transaction, price is paramount in any MBO. Shareholders will have their expectations, whilst the management team will naturally wish to minimise the amount they have to pay.

Management teams don’t typically have much equity funding to bring to the table and usually finance the purchase through debt, deferred consideration or Private Equity support (and often a combination of same).

Deferred consideration

The use of deferred consideration is a classic way to bridge the gap between the seller’s and buyer’s valuation expectations. This allows the management team to pay a portion of the price out of future profits and after the transaction closes. This can be a helpful compromise to ensure both sides get the deal done in a timely fashion and without falling out during negotiations.

External advice

Advisors are typically involved in any MBO process. There are many elements to a successful MBO process, including agreeing valuation, determining the funding structure, raising the money, negotiating key points & agreeing the legals. Advisors also bring a level of experience and impartiality to a transaction that can help surmount the various obstacles to a deal. 

As both the management team and the existing shareholders know the business well, the process (if run properly) can be carried out efficiently – often within six months – from inception to completion.

Deals in a pandemic

Appetite for MBO deals has not been diminished by COVID-19, according to Flood.  “We are advising on a healthy pipeline of MBOs. Doing deals in this environment brings new considerations and many steps in the process are now being executed on virtual platforms such as MS Teams and Zoom. But we have not seen anything fundamentally affect the appetite for MBOs. In certain cases, in fact, the pandemic has increased the appetite for MBOs as shareholders accelerate their plans for retirement due to the challenging trading environment that may lie ahead.”

Get in touch

For further information on management buyouts, please contact Niall Flood of our Corporate Finance practice.

This article originally appeared in Business Plus magazine, and is reproduced here with their kind permission.

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