Blog
Management buyouts - what you need to know
April 6th 2011
Management buyout or “MBO” opportunities are frequently missed because of a lack of understanding about what is feasible, the steps involved and how much personal money a management team would need to contribute. In this month’s blog we discuss a few of the issues.
A management team faced with the possibility of initiating or taking part in a buyout has a unique and exciting opportunity. Buyout opportunities can arise for a variety of reasons for example business owners may wish to retire or a group may wish to dispose of a non-core business. Sometimes vendors prefer to explore the sale of a business to management before contemplating a trade sale as they would rather the business remained independent and the sale be kept as confidential as possible.
It is important to carry out a feasibility assessment of an MBO opportunity at the earliest possible stage. Specific factors need to be present for a proposition to ‘tick all the boxes,’ such as:
•Does the company have a track record of profitable trading?
•Is the business itself free of high risk factors, such as heavy reliance on one or two customers?
•Does the management team have a diverse skill set and the requisite experience?
•Does the vendor have realistic expectations about price combined with the will to defer a proportion of the consideration?
One common misconception surrounding buyouts is that a team itself has to raise the funds personally to pay for the deal. This is not the case, although team members do need to invest an amount of money which is meaningful to them personally. The vast majority of any deal consideration is usually provided by third party financial institutions such as banks, venture capitalists and the vendors themselves by way of deferred consideration.
There is no denying that the availability of funding for buyouts has reduced since the banking crisis, however good quality buyout propositions which meet or exceed all of the necessary criteria can still be successfully completed – we completed three management buyouts for clients in 2010.
Only a few of the many issues involved with buyouts have been considered here. A new dedicated website launched recently by Strategic Corporate Finance at www.managementbuyout.co.uk is a worthwhile starting point and source of information for anyone who may be contemplating an MBO from either the buying or selling side.
