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A management buyout (MBO) involves a company’s management team pooling resources to acquire all or part of the company they manage.
Management buyouts can benefit both parties. The company gets assurances of its future success, whereas the management team gets the opportunity to benefit more from the company’s future profits.
However, an MBO can be a complicated process and many MBOs fail to create additional value. So, some considerations need to be made for them to bear fruit.
Is the business right for an MBO?
Not every business is right for an MBO. What are the hallmark signs of success?
- A company with a track record of profitability
- Few high-risk factors
- Good future prospects for the company
- A vendor who is open to selling and gives a reasonable price
- A deal structure with a viable funding plan
What type of funding?
It’s unlikely that a management team that is interested in an MBO will have enough resources to buy the company on its own. For this reason, they will need to secure funding.
However, the funding options available are not restricted to business loans. In fact, there are options that are more geared towards MBOs. So, what are they?
Asset finance is funding from a bank that lets the company leverage its assets, which usually include property, shares, or debtors. This option is more feasible for asset-rich companies.
Banks consider giving a cash-flow loan to a team conducting an MBO for a specified term, usually 3-5 years. Since this is a longer-term option, the team needs to be sure they’re in it for the long haul.
As well as banks, management teams can turn to external investors. Private equity funds focus on backing the right teams and businesses, so as to turn a profit.
If the management team is strong, as well as the business, profits, and growth prospects, then PE funding is realistic. Also, this type of financing sometimes offers additional benefits beyond money.
Vendor loan notes
Often, the sellers smooth over the transition by leaving some of their money in the company as loan notes to be repaid over time. This can help complete the buyout but shouldn’t be counted on as the sole funding strategy.
Is the plan well-researched?
An MBO is a huge undertaking and shouldn’t be treated lightly. Make sure that you have your information squared away, down to the minutest detail, before initiating.