Open your eyes to management buyouts

With the numbers of trade and institutional buyers declining, management buyouts (MBOs) should be looking attractive to medium-sized business owners hoping to offload assets. Not only do they offer a convenient solution for the seller, but they also tend to help a company continue as it always has – meaning fewer redundancies and operational changes.

Although MBOs are less common than they used to be, there are measures that outgoing entrepreneurs can take to ensure their life’s work is not lost when they exit.

New figures from Experian Corpin show that the number of MBOs taking place between 2005 and 2011 fell from 403 per year to just 217. The number of MBOs taking place for small and medium-sized enterprises is even lower, falling to just 50 this year.

The scarcity of finance to pay for takeovers is often blamed for the lack of interest from managers and this is certainly a problem. Lenders often begrudge financing MBOs as they are perceived to be high-risk deals. However, there are often more complex factors that get in the way of what can be the best solution for everyone involved.

Business owners are often as unwilling to see the potential in MBOs as lenders are, adding to the challenges facing managers who have the inclination to buy a business from their employer. The business owners and the management team must keep all lines of communication open with regard to any possible deal to ensure the business has a chance to survive post-MBO.

Some recent successful MBOs include the takeover of CPMG Architects in Nottingham by a four-strong team dedicated to expanding the business; and the buy-out of Confluence Management, which provided finance for expansion from its base in the West Midlands.

With such shining examples of success, why do so many potential MBOs fall by the wayside? One of the major issues can be the balance of power between the business owner and the management team, who almost immediately become equals as soon as the MBO is presented as an option.

The ideal scenario is for the management team to have received guidance from a third party about their options should an MBO opportunity arise, well in advance of the owner’s exit. In addition to this prior knowledge, financial support from the management team’s own pockets or from an investor who might join the team to form a buy-in management buyout (BIMBO) is vital in most cases.

Aside from accessing funds from a management buy-in partner, the business owner and the management team also have the option to structure a deal where a large part of the business is offered as deferred consideration. This can even help the deal to go ahead using finance from the vendor himself.

In conclusion, when selling a business there is a huge amount to consider above and beyond the asking price and finding a buyer. Exiting entrepreneurs who run SMEs are likely to retain a sense of responsibility over staff, brand and reputation and it is these factors that MBO deals can effectively safeguard the business into the future.

The current economic climate is an additional factor that makes MBOs an option worth considering. When buyers are faced with an uphill struggle when trying to sell a business, all possible options need to be scrutinised and an open mind should be maintained throughout the process.

Also see: Management Buy-ins in the UK with examples

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