A management buyout (MBO) is a form of acquisition where the company’s existing managers acquire all, or a part, of the company from the current owners. An MBO works where a motivated and competent management team can transition smoothly from subordinate to owner.
As an owner, your preference may be to sell the business to those who have helped you create the wealth in the first instance, rather than to an independent third party.
As with a family transfer, an MBO has its risks:
- Managers are often cash poor and must fund the transaction from other sources, thereby adding delay and uncertainty to the transition. Vendor financing is an option, but this usually results in deferred payments.
- The valuation may be significantly less than if you sold the business on the open market – see Trade Sale
- Management may be conflicted (say in the lead up to the transition), if the sale value is tied to performance.
- You can establish a fund inside the business in advance of the transition.
- You have greater control during the buyout process.
- Continues your legacy and preserves the culture of the business.
- Ensures all employees who helped you build the business, don’t lose their jobs.
- No Cash up-front, unless you have pre-funded the transaction, as referred to above.
- Greater risk as the owner’s sale proceeds come from the future earnings of the business after he leaves it.
- It is unlikely management can afford it.
- Not all managers and employees can make the mindset-transition from employee to owner. Will the employees run the business into the ground and require you to come back in after tasting some of the good life that retirement provides?
Important Caveat – Choosing whether this transition alternative, or a mix of the other 7 alternatives on our website, is right for you really depends on your (and your shareholders) individual circumstances. This important decision requires careful analysis, before deciding which alternative strategy suits your circumstance the best. Smart transition decisions.