What is a management buy-out?

A management buy-out is the acquisition of a company or business unit by the incumbent management or other employees. For the current owner, this can be an attractive way to transfer their ‘baby’ to capable successors who already have experience within the company. For the incumbent management, it is a great opportunity to start doing business on their own account within a market and company they already know very well.

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: an MBO is usually a long-term process. Read below for the steps you will move through during a management buy-out:

In most cases, one of the two parties makes the first move – 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 MBO 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 buying a company or a business unit. This could include an initial agreement of intent that sets out what the acquisition will entail.

The parties in a management buy-out also have to agree on the acquisition amount. Use our Marktlink Multiple tool to get an immediate indication of the company value, including a detailed report. This step should also involve thorough research into the company, usually in the form of due diligence.

Finance for a management buy-out differs from external acquisition of a company. In most cases the incumbent management will not have sufficient capital to finance the purchase and alternatives must be sought. This can be a bank loan, or a subordinated loan from the current owner. Private equity is another solution but means accepting the influence of a third party. It is important to ensure there are clear agreements about management buy-out finance.

Once all agreements have been made, the price has been determined, and management buy-out finance 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 set period.

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Advantages of a management buy-out

A management buy-out offers advantages for both buyer and seller. Here are the most significant:

High success rate

After an MBO, the company remains in the hands of people who know the company like no-one else. If the management and the director/major shareholder know each other, this can smooth the road to success.

Stability and continuity

Customers and suppliers are unlikely to notice much difference: for the most part they will continue to work with the same people and the risk of them going elsewhere is likely to be low. Staff should also experience minimal changes.

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 a straightforward 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 with the seller acting as a co-financer. Since both sides probably 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 only time you will experience the process. Luckily, management buy-outs are familiar territory for us.

Make clear agreements

In many cases, acquisitions involve opposing interests, but in a management buy-out the bond between owner and management is usually very good, or the management buy-out option would not be on the table. But having a specialised outsider observe with a professional eye is still important: they can help to ensure that emotions are kept out of the negotiations.

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Make clear agreements

If you are taking over the company with other managers, you should consult well beforehand to ensure you’re all ‘singing from the same hymn sheet’ and your vision for the future is well aligned. This includes both strategy and operational management: create a business plan, make clear agreements, and make sure everything is put in writing in a correct form.

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 unknown or unexpected inadequacies come to light, your chances of legal redress will usually be very low unless a thorough investigation was carried out beforehand, usually in the form of due diligence.

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