Management Buy-Outs…not necessarily a route to the nearest Emergency Exit

14th September 2017

When a business owner’s thoughts turn to a well earned retirement, there are a number of options they might consider for selling their business. Probably the most commonly pondered exit route is a sale to another company; possibly a competitor, customer or supplier. 

Historically, entrepreneurs may not have given much attention to the possibility of their management team buying the business from them. Even if they had considered that option, it was often a less preferred exit route, and sometimes thought to be the last resort. Worries about structuring the deal, and whether the management team could afford to raise the necessary finance were key concerns.

However, in recent years, that has all changed. There has been a significant shift in attitude, for a variety of reasons. Management Buy-Outs (MBOs) are now considered to be a real and credible alternative to a trade sale.  They are proving to be an extremely popular exit route for some of our clients, and HB&O Corporate Finance has seen a noticeable increase in activity.  In the last 12 months, we have advised clients on no fewer than nine MBOs, which is the most in any year, since I joined HB&O in 2007.

MBOs provide an effective way to allow the current owner to step away from the business, whilst at the same time preserving the business’ legacy. Whilst a trade sale may result in significant upheaval for the target business, with a possible change in personnel, systems and location, an MBO usually provides continuity in operations, with the same staff running the same business from the same location. Sellers like the idea that the business will carry on with the status quo, and feel reassured by that continuation. The proposition sits easier with them knowing that there will be no significant change for staff or customers, and that the business they spent many years of blood, sweat and tears to build up, will largely be unchanged. Owners are also more comfortable that they know who they are dealing with.

Aside from the warm feelings that might be experienced, there are some other tangible benefits for an owner to explore the MBO route. The existing management team is already likely to have a detailed and intimate knowledge of the business’ affairs. Therefore, lengthy and costly due diligence procedures (where purchasers undertake a detailed review of the company’s finances, and legal and commercial affairs) can be streamlined. The legal agreements to formalise the sale can also, potentially, be simplified. The extensive warranties, which an unconnected buyer would usually demand, can often be reduced, as the management team isw already aware of many issues. It is also unlikely that the new owners will require the seller to remain with the business for any significant handover period. This generally means the deal can be done more quickly, efficiently and for less cost, allowing the current owner to enjoy their retirement all the sooner.

Funding is also becoming less of an issue and the management team does not, necessarily, need to put in a large amount of their own cash. Lenders are more in tune with MBOs as an exit route, and more amendable to considering them. There are a very wide range of specialist lenders in the market place at the moment, which provides much more choice and flexibility. HB&O is in a perfect position to advise the seller (and the management team) on finance options, through our in-house finance broker, Mark Edwards. Mark, having spent 30+ years with Lloyds, has extensive knowledge of the local finance market, and will be able to talk both sides through the possibilities.

Of course, MBOs won’t suit all businesses. The capability of the management team will still be a key consideration, as will their motivation and commitment. As part of a wider exit planning consultation, we will assess the capabilities of the team and discuss all the options with you. If an MBO is not possible, we will talk you through the alternative ways to complete a business sale. However, in many cases, an MBO provides a credible, quick and effective exit route.

If you would like to discuss whether an MBO might work for your company, or simply talk about your retirement plans and the options available for you to exit the business, please contact me for an initial, informal discussion on greg.philp@hboltd.co.uk or 01926 422292.