Selling your company to one of your employees, someone from the current management, for instance, is called a Management Buy-Out. For you as the entrepreneur, there are several reasons why this option is interesting. Your successor knows the company like no other and it is a great opportunity for the potential buyer to do business in a market they know and have experience in. We will take you through the process of a Management Buy-Out, what steps you ought to take, the advantages and some tips to ensure a smooth process.
What does a Management Buy-Out look like?
No two acquisition processes are alike, and the same can be said for a Management Buy-Out. Many factors can affect the duration of such a process, but this is what a Management Buy-Out process generally looks like:
Exploring mutual interest
It goes without saying that for a Management Buy-Out, it is essential for both the entrepreneur and the potential buyer to express interest. Once this has been established, the actual process can start.
Expressing wishes and expectations
It is important to talk about wishes and expectations in order to find out whether a Management Buy-Out is indeed the best option at this moment. This conversation is the basis for a preliminary Letter of Intent, which sets out the first agreements.
Valuation of the company
Because the interests of the entrepreneur and buyer can differ completely, the acquisition price can be a sensitive topic. That is why our advice for both parties is to call in an M&A specialist to keep a close watch on the objectivity of the due diligence process.
Securing financing
With a Management Buy-Out, the potential buyer does not usually have enough own funds, so alternative financing has to be secured. This can be a bank loan or a subordinated loan from the departing entrepreneur, but a buyer can also look to an investor for help. Whichever alternative you choose; make sure that the agreements made are clear and recorded.
Finalising the acquisition process
When all steps have been completed, the acquisition price has been determined and the financing has been secured, the acquisition can be celebrated. Together, you agree on a period of time the current owner will remain active in the company to, for example, carefully finalise the acquisition.
When is a Management Buy-Out the right choice?
There are several reasons why a Management Buy-Out might be the right choice for you. For example, when there is no successor within the family but there is one within the company, or when the current owner prefers a colleague. For large international companies, a Management Buy-Out is often used to sell a particular branch. Whatever your reason might be, there are several advantages and disadvantages of a Management Buy-Out.
Advantages of a Management Buy-Out
- There is a higher chance of success because the new owner does not only know the company well but also its management, employees, relationships, stakeholders and customers.
- The acquisition process is usually simpler because the potential buyer is already aware of the company’s financial condition. Due diligence can be an accelerated process since it will merely be a check of information that is already known.
- Although securing financing is more challenging than in an acquisition by an external buyer, a Management Buy-Out does offer the opportunity for the entrepreneur and potential buyer to make financial agreements. Precisely because both parties know and trust each other, there are several options.
Disadvantages of a Management Buy-Out
- A good manager does not necessarily have the qualities to be a good entrepreneur.
- The acquisition price is usually lower than when selling to a strategic party or an investor.
- Often when negotiations turn out to be unsuccessful, it has consequences for the position of the intended buyer.
A successful Management Buy-Out
Whether you find yourself on the selling side of an acquisition or you are the potential buyer, a Management Buy-Out is a big step for both parties. In order to maintain a good relationship built on trust, it is absolutely necessary for each party to engage their own advisors. This way, objectivity and professionalism are ensured and at the same time you have a confidential advisor with whom you can discuss any doubts or insecurities you might have about the process. No matter how good the relationship between the seller and buyer is, during acquisition talks these parties tend to have opposing interests.
Record agreements as much as possible. In the case of multiple potential buyers, you are advised to draw up a business plan together, containing the vision for the future, strategy and business operations. The buyer has the legal obligation to investigate the company; this is usually done through a due diligence process. This investigation is a condition in order to appeal to a judge should there be unknown or unexpected snags after the acquisition.
Are you considering an acquisition through a Management Buy-Out?
You have come to the right place if you considering a Management Buy-Out. Marktlink’s advisors are happy to help you map out your wishes and ambitions. Together, we explore what the best options are for you. What you can expect from us is a down-to-earth way of working; we are an independent firm with an entrepreneurial mindset. With over 25 years of experience, we know precisely what is needed to guide you towards the best deal of your life.
