A Management Buy-Out is an acquisition of your company or business unit by the incumbent management or other employees within the enterprise. For the current owner, this may be a suitable option for sale in order to transfer their ‘baby’ to capable successors with experience within the company. For the incumbent management, it is a great opportunity to start doing business within a market and company they are familiar with.

How does a Management Buy-Out work?

A Management Buy-Out broadly speaking always follows the same steps. How long it takes is different every time; a Management Buy-Out is usually a long-term process. Read below for the steps you will move through during a Management Buy-Out:

Of course, the entire process starts with a first step. In most cases, it is one of the two parties who takes the first initiative – either the current owner or the incumbent management. It could also be that both parties have already made a joint decision, which often makes the process easier.

You will then start a dialogue to express wishes and expectations, and to figure out whether a Management Buy-Out is actually the right decision at this moment in time. This initial conversation can be the impetus for the first steps towards acquisition of the company or a business unit. This could include an initial agreement of intent that sets out what the acquisition will entail.

The parties will also have to agree on the acquisition amount. Our Multiple-tool is available to use for the company valuation. Complete the Multiple to see an immediate indication of the company value, including a detailed report. This step will also have to involve thorough research into the company, usually in the form of a due diligence.

Finance for a Management Buy-Out differs from external acquisition of a company. As the incumbent management does not have sufficient capital to finance the purchase in most cases, alternatives will have to be sought. This could be a bank loan, or a subordinated loan from the current owner. Another solution may be a private equity party, but this does make it more difficult for the buyer, as it invites a third party with influence. Ensure there are clear agreements about finance.

Once all agreements have been made, the price has been determined and financing is in place, the acquisition can be officially concluded. Depending on the arrangements, completion may take some time. It may be that the former owner stays active within the company for a certain amount of time.

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Advantages of a Management Buy-Out

A Management Buy-Out offers several advantages for both buyer and seller. See below for a list of the biggest advantages.

High success rate

After the acquisition, the company remains in the hands of people who know the company like no other. It is more likely that the company will continue to be successful than if an outsider steps in. What’s more, the management and the director-major shareholder know each other, which could speed up the process.

Stability and continuity

Nothing much changes for customers and suppliers, they will continue to work with the same people, for the most part. It means the risk if them going somewhere else is much lower. The same is true for staff; the changes for them are minimal too.

Simpler acquisition process

Depending on how involved the management is in the company’s financial matters, the financial process could be accelerated. If they are already up to speed with all the details, the audit can be completed faster – it will just be a check of information that is already known.

Financial agreements

In a Management Buy-Out, financing is a challenge, but there are advantages too. You can make financial agreements among yourselves. For example, part of the purchase price could be in the form of a subordinated loan. It means the seller acts as a co-financing seller, as it were. Since the seller and the buyer most likely already know each other, there is a relationship of trust that makes the seller more likely to agree to this.

Tips for a Management Buy-Out

A Management Buy-Out is an important and major step for both parties, and probably the one and only time you experience this process. Luckily, Management Buy-Outs are familiar territory for us. Read our tips here.

Engage an external viewpoint

The bond between owner and management is usually very good, otherwise the Management Buy-Out option would not be on the table. In many cases, acquisitions involve opposed interests. Having a specialised outsider observe with a professional eye is important. This external party is detached from any emotions at play, and can do the negotiating, so that order can be maintained.

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Make clear agreements

In the event you are taking over the company with other managers, you should consult well beforehand. The vision of the future is particularly essential. It is important you’re all singing from the same hymn sheet. This includes the strategy and operational management: it is nice if all partners are on the same page. Therefore, make clear agreements and make sure everything is put down in writing properly. We would recommend a business plan.

The mission of Marktlink

At Marktlink we show every day that the business acquisition process is inspiring and fun. We always find a creative solution. Nothing is too crazy for us. We get the deals done in a unique and discreet way and above all with passion. We always strive for the best result for our clients.

Do thorough research

When you are in the process of buying a company or business unit, you have a legal obligation to investigate before the acquisition is finalised. Should any unknown and unexpected inadequacies come to light, you can only call upon a judge if a thorough investigation was carried out beforehand. This investigation is usually in the form of a due diligence.

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