For a business owner, thinking about exit can be daunting. But sometimes, the right answer is already in the building.
Where you don’t have the next generation of the family waiting to take over, a great exit strategy can be a Management Buyout (“MBO”). This is where existing management buy the business from you. While this can be a fairly smooth way to exit, there are still a number of things to consider.
Continuity of the legacy. This option gives you a trusted home for the business and its employees, run by people who already know and understand it. It’s probably the closest option to leaving the business in a trusted pair of hands – which can matter a great deal if you’re staying involved, or if there’s an element of earn-out or deferred consideration in the deal.
A smoother process. You’re not sharing all your information with a buyer pool that likely includes competitors, and it can be quicker than running a full auction process. The flip side is that you might get a higher value through an auction – but sometimes speed, certainty, and trust outweigh a higher valuation.
Expect some panic at first. When an MBO is first proposed, it can be daunting for management. Not everyone has the appetite to grow a business or become an entrepreneur, and they’ll often immediately panic that they’re expected to sell their house and take on a load of personal debt. There’s usually a bit of an education process required in how an MBO actually works and what it involves.
Confirm funding before you close other doors. If your management team is keen, you need to ensure they have the funding – from a debt provider or private equity fund – to do the deal, before rejecting any external offers. It’s a tricky dynamic to manage: once the management team decides they’re a “buyer,” it’s hard to backtrack and sell to someone else, since a new owner won’t have the backing of the management team, and the business will look less attractive as a result.
Keep eyes on the day job. During an exit or investment process, we so often see sellers or management teams getting distracted from running the business day-to-day. This is equally true for an MBO team – you have to ensure they remain focused and don’t take their eye off the ball.
Don’t let familiarity replace advice. It’s easy to assume that because you know the business and you know the buyers, the process can be informal. It shouldn’t be. Get proper corporate finance, tax, and legal advice on your side of the table – the SPA needs to protect you just as much as it protects them, and a fair, well-structured deal is more likely to actually complete.
Done well, an MBO can be a genuinely good outcome for everyone – legacy protected, team rewarded, and a smoother process than the alternative.
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