5 Steps to a Management Buyout

April 23, 2021 / Business Tips

For company directors considering selling their business, there are a number of options available that you need to be aware of in order to find the best one for you. These include:

  • Selling the business to a third-party buyer
  • Winding the business up
  • Putting the company through liquidation
  • Opting for Management Buyout (MBO).

With an MBO, the management team of a company will work together to buy either all or a majority stake of the company, therefore buying out the current owner and taking control of the business themselves.

An MBO can occur in any business and in any industry, and is a popular option for business directors looking to move on from the company.

To help you decide whether an MBO is the right move forward for you, in this article Clarke Bell outlines what Management Buyout is and 5 steps involved in the process.

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What is Management Buyout?

Management buyout (MBO) is a transaction where the management team within a company puts together its resources to acquire all or part of the business they manage. Usually, the management team will then take full control of the business and use their skills and expertise to drive it forward.

An MBO can occur in businesses of all sizes in any sector. This is usually a way to buy the existing owners out of the business, but it can also be used to break a particular department away from the main operations.

There are many reasons an MBO opportunity might present itself, including:

Advantages of a Management Buyout

One benefit of an MBO is that they are fairly simple and easy to arrange.

Rather than having to invest time, energy and money into marketing your business in order to find a suitable buyer, with an MBO the buyers are already there and ready to go. This normally allows for a smooth transition of ownership.

What’s more, in cases of an MBO company directors can rest assured that the buyers have an in-depth knowledge of the business and how to run it. This gives you peace of mind that you are passing the company on to a group who you know and can trust.

For this reason, companies purchased through a MBO have a high chance of ongoing success.

How is an MBO undertaken?

An MBO includes several steps.

1. Analysis of the management team

Firstly, the owner must ensure they have a strong management team, with experience and credibility, who they know they can trust to do a good job of operating the company and communicating in a consistent, straightforward way throughout the process.

2. Management enter the planning stage

Whether it is the owner or the managers that have initiated the proposal of an MBO, the next step involves the management team planning what they will pay for the assets and how they will run it post-purchase.

This stage involves a number of planning tasks including creating a financial model, working out valuation terms, laying out the strategy for running the business and outlining the team members’ individual responsibilities within this strategy.

During this stage it is important for the management group to use their experience within the company to to analyse the key risks or questions they might have about investing in the purchase of the business.

3. Make an offer 

Once the management team have completed this initial planning stage, they should next approach the company owners with an offer to buy the business.

This can be done in different ways. It might be that the management team has an informal conversation with the owners expressing their interest. In other cases, the management team might send a formal letter to the owner including specific terms for the transaction.

However the management team go about it, the goal at this stage is to gauge the owner’s interest in the transaction and show why the current management team is the best buyer.

This stage can also happen in reverse, with the owners approaching the management team. If this is the case, the owners will likely already have a value for the company in mind and the management team will then decide if they wish to pay that amount.

4. Funding

Once the amount has been agreed, the management team will need to raise the funds needed to buy the business. It is common that the management team won’t have enough money to fund the purchase alone, and so must find financial partners to help out. These can include sponsors, private equity firms, banks and/or mezzanine lenders.

5. Due diligence 

The final step is due diligence. At this stage the management team and its financing partners aim to learn everything they can about the business. This includes answering key questions and looking at mitigating any potential risks.

Common actions at this stage can include a market size analysis, quality of earnings analysis and a review of legal and regulatory issues/obligations. These tasks are often outsourced to experts.

During this stage, the buyers and their legal team will concurrently negotiate the purchase agreement and other legal documents necessary to close the purchase.

Considering closing your business? Let Clarke Bell help

Whether you are considering closing your business through an MBO or other means, such as Creditors’ Voluntary Liquidation or Members’ Voluntary Liquidation, Clarke Bell can help find the best option for you.

Our team of experts will work with you closely to understand your situation and get the best possible outcome. To see how we can help your company get in touch today to talk through your case or for some free, initial advice.