What is a management buyout and how does it work?

Building a successful business takes many years of hard work and dedication but when the time comes to sell, you have plenty of different options. A management buyout is one of those options, allowing you to hand over the reins to your trusted management team.

But what exactly is a management buyout and how does it work? In this article, we share whether a management buyout is the right decision for your business.

What is a management buyout?

Simply put, a management buyout (MBO) involves a company’s management team combining their finances to purchase the company they manage from the owners. Usually, this results in the management team taking full control and ownership of the business. Whilst the concept of a MBO sounds simple, it can be a complex process with various different moving parts.

In recent years, management buyouts have grown in popularity as it makes it easier for owners to exit a business without having to search for a seller. Leaving the company they worked hard to grow in the safe hands of a management team they know and trust. 

How does management buyout work? 

A management buyout can be a complex affair with various factors required to line up – the desire of the management team to purchase the business, the availability of funding and whether all parties agree to the terms. 

Typically, the process of a MBO will look like the following:

• The owners will wish to sell part of or all of the business
• Members of the existing management team then decide if they wish to buy the business
• The owners and management team agree on a sale price which should involve an independent business valuation
• The management team will determine the amount they can invest before seeking further funding, if needed
• A detailed financial analysis of the business is undertaken
• The management buyout team will approach external providers of finance and funders for any additional investment
• The existing owners may well assist in the financing by providing vendor loans or an element of deferred consideration
• If the investment is secured, the sale is completed, and the management team now own and takes control of the business

The most difficult step of a management buyout is often securing finance and investment, which can delay the process.

What are the advantages of management buyout? 

A management buyout has plenty of benefits for both the buyers and the sellers. Here are some of the key advantages of MBOs:

• Smooth transition – as the management knows and understands the business already, it can easily transition without much disruption. This also leads to a higher chance of future growth and success
• Convenience – if owners are looking to sell their business, they won’t have to search for a buyer, instead, they can sell to the management team, saving time and often money
• Tax Efficiency – The sellers can take advantage of structuring the deal in a manner to best suit their tax position and take advantage of capital gains tax  rates of tax
• Confidential – sensitive company details won’t need to be shared with external parties, this boosts confidence with existing investors, suppliers, clients and staff
• High rate of success – as the management team already knows the business, the sale is much more likely to go through, they can also hit the ground running

What are the disadvantages of management buyouts? 

As with all significant business decisions, there are still some disadvantages to consider before proceeding with a MBO:

• Challenges in raising funding – in most cases, the management team aren’t able to raise all of the finances themselves to purchase the business. This means that they must seek further funding from banks or private equity firms. Sometimes, this can be difficult to obtain, adding complications to the sale
• Lack of ownership experience – whilst the management team understands the business, they won’t necessarily have experience in owning a business. This means that they may not know whether they enjoy ownership until purchasing the business
• Insider trading risks – the existing management team could potentially take steps to reduce the company’s profitability before making the purchase to lower the price. For this reason, independent valuations and advice should be sought by both parties.

How is management buyout different from management buy-in? 

A management buyout and management buy-in (MBI) may sound similar but they are entirely different purchases. A MBO sees the company’s existing management team purchasing the business. A MBI is when a team outside the company purchases the business and becomes the new management team. 

Therefore, a MBO is often preferred as the current management team understands the business and the completion of the sale tends to take less time. 

Is management buyout a good way to sell your business? 

Every business is different and what works well for one may not suit another. Here are some key signs that your business would facilitate a successful MBO:

• The company has a good track record of profitability
• The future prospects of the company are strong with few risk factors
• The management team is strong and committed with a mixture of skills
• The management team are willing to explore a realistic sale price

If all of the above aligns, then your business can benefit from:

• Business continuity
• A confidential sale process
• Lower costs than an external sale
• Simplified due diligence process
• Lower risk of failure than a sale to an unknown third party

How long do management buyouts take to complete? 

Any purchase of a business takes time as it’s a complex process. As external funding is often required, MBOs can vary in timescale but often take between six and nine months. Not only will the buyer need to secure funding but also seek legal expertise and financial advice. In order to sell any business successfully, time, patience and expertise are required. However, once completed, your business is in the safe hands of your existing management team, with confidentiality maintained.

Get in touch

Management buyouts can be a great way to sell your business whilst keeping your company with a team you know and trust. With so many benefits for all parties involved, it’s easy to see why MBOs are growing in popularity. At Rayner Essex, we offer management buyout services, whether you’re looking for advice or need help executing the buyout, our corporate finance experts are here to help. We advise businesses in all industries, so if you need management buyout expertise, please get in touch with us today.