We are frequently approached by clients concerned about the future of their business after they let go of the reigns. They also worry about the potential cost, time and energy finding a suitable buyer. An exit should be an exciting time in the life of a business and its owners; but corporate sales can be stressful and expensive.
Management buy-outs (MBOs) are a popular option for clients looking to mitigate some of their concerns when selling their business. An MBO is where the existing management team takes over the company rather than a third party. We have set out five reasons why an MBO might relieve some of those succession headaches:
1. In safe hands
An MBO team made up of directors and senior employees have already been working for the business. Often they will have a close relationship with the exiting owners and an intimate knowledge of the business operation and its values. This gives sellers peace of mind that their business is in safe hands for future generations, especially if family members will continue to retain a share.
2. Keeping it confidential
For lifetime owners of a business with long term relationships, an exit can be both a personal and sensitive matter. Sellers want to ensure the exit remains confidential during the sale process so as not to concern existing clients, suppliers and employees potentially damaging the company’s performance. It is easier to maintain confidentiality and discretion selling internally. Businesses also hold valuable confidential information. An MBO reduces the amount of sensitive information divulged to external third parties during the transaction.
3. Attractive buyers
Depending on the valuation of the business, prospective buyers may need to borrow cash or raise investment to finance the acquisition. Funding management teams can be a more attractive proposition to banks and private equity investors for various reasons. Companies acquired by way of an MBO are considered to have a better prospect of ongoing success and profit owing to the management’s existing track record and knowledge of the business. Sellers and management have often already identified and agreed the changes required for the business to be successful in the future long before the exit. Also, maintaining relationships with key clients and suppliers is often easier in an MBO.
4. A smooth deal
MBOs can be quicker and cheaper than traditional sales. Importantly, sellers will not have to incur the time and costs associated with marketing to and identifying a buyer.
As the buyers already have a detailed knowledge of the business, the level of due diligence required to investigate the target is often reduced (subject to any investor/lender requirements). Communications and negotiations between the parties are often less aggressive in an MBO. What would be contentious issues in third party sales are often ironed out amicably between counterparts in an MBO due to the existing relationship. This can reduce costs incurred by the parties.
5. Post completion peace of mind
Owners who have already stepped down from managing the business are sometimes nervous about the extent of the warranties they are required to give in a third party sale. The level of warranties required in an MBO is significantly lower as the Buyer already knows the business. Where comprehensive warranties are required (e.g. by an investor), the acquiring management team may be jointly liable with the sellers for warranty breaches. Therefore, sellers in an MBO have greater comfort in the post-completion warranty limitation period where their exposure to warranty claims is reduced and shared with the new owners.