Management Buyouts

Management buyouts are now one of the most popular forms of acquisition in the UK. Most often they are triggered by one of two situations:

If the company has been identified as non-core by the large parent corporation that owns it, management may be motivated either by a desire to grow and develop the business, or to safeguard their own positions against the possibility of facing a trade sale.

If the company in question is a privately-owned small to medium business, the shareholder's retirement or succession plans can lead to management deciding to make a bid.


Although necessarily complex and stressful transactions, MBOs can be successful for a number of reasons. They allow owners to realise their shareholder value in a more discreet and confidential manner than exposing the business to trade buyers, and the due diligence process is far shorter. The management team are able to acquire a controlling interest in their company, a share of its profits, and a rare opportunity to make large gains on a very large investment. Finally, the company is also likely to benefit from owners who are best placed to develop its profitability. So how do you decide if the company you work for is a suitable MBO target?


The Team

A strong and experienced team is essential for a MBO. It must cover all of the company's functions at a senior level, including, for example, a managing director, sales director, creative director and a finance director. In larger deals, involving experienced outsiders as non-executive directors can add credibility to your proposition.

MBO teams should be prepared for an unprecedented level of detailed questioning during the fundraising process. They should also expect to assume a massive amount of risk with regards to the "warranty gap" imposed by backers and the company sellers, and to make a personal investment in the business, which often involves remortgaging their homes. Finally, the team should recognise the forthcoming change in their roles, and assume responsibility for many areas of the company they have previously taken for granted, for example the company's IT infrastructure, payroll system and human resources.

Although thinking about succession is unlikely to be the first thing on the management team's mind, finance advisers recommend that careful consideration is given to a proposed exit route and realisation of the funder's investment at the very beginning of the MBO process. Planning your exit, either via a secondary buyout or trade sale, or a flotation depending on the achievement of certain milestones, will make the MBO appear more viable to a funder who may be considering their own exit.


The Deal

Funding is always a difficult part of the MBO process, but it is much easier to secure for a business with good growth prospects. As much visibility as possible regarding growth, future performance and cash flow are key. Strong cashflow, unique selling points, and a stable, strong growth sector - saturated markets or 'risky' industries are less favourable - also go towards making the
business a more attractive proposition.


How the company progresses after a MBO has been secured may be dependent on how the deal was funded.

Deals secured via vendor financing are becoming increasingly popular in smaller companies, and allow the management to pay a nominal fee at the time of sale. The real price is paid over the following years out of company profits, typically within a 3 - 7 year timescale. As well as reducing the initial investment required from the team themselves, the lack of involvement with banks and private equity firms can mean that they are left in complete control of the company. These deals can prove a disadvantage to the seller, particularly as their payment is highly dependent on increased profits post-sale, but there are some tax benefits involved and they can result in a higher purchase price overall.


The most common MBO funding comes from banks, private equity firms and venture capitalists. While these have the advantage of up-front investment, there are well-documented pitfalls to avoid with regards to a clash in expectations. Typically VCs focus on maximising a quick return on their investment, and this may not sit very comfortably with the management team's concern for long-term targets and in some cases inexperience in running the company. The level of participation required can either lead the management to feel that they are not in control, or on the positive side, can provide a welcome relief and support mechanism. The key to ensuring a profitable relationship is adequate disclosure, keeping an eye on both common goals and on the trade aspects of customers and contracts.

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