How To Exit Your Business - Option 2 Management Buy-Out (MBO)

The pandemic accelerated an already growing number of business owners considering an exit from their companies – whether for reasons of work-life balance or simply a desire to change industry or location. In his latest series of articles, Corporate Partner Euan McLaughlin, looks at some of the exit routes available to business owners.

No 2 - Management Buy-Out (MBO).

A management buy-out (MBO) is exactly what it sounds like – one or more members of the management of the company buy-out some or all of the existing shareholders of the company. There are a huge number of acronyms bandied around for MBOs, including FAMBO (family MBO), VIMBO (vendor-initiated MBO) and PIMBO (purchaser-initiated MBO). In each case, the essential characteristics of an MBO are likely to remain the same. A cynic might say that the acronyms are only there to make the process sound more mysterious!

Most commonly an MBO will be under consideration where:

• attempts to find an external buyer have been unsuccessful or the industry so narrow that an external purchaser is highly unlikely;
• the existing management are so critical to the business that the business is worth more to the management than it would be to an external purchaser; or
• where there is a strong desire for the company to pass into the hands of the management team. This is often because of family ties between the seller and the managers, but it is also common to see an MBO where it is in satisfaction of a promise made in the past to reward the loyalty and hard work of members of the management team.

Key advantages of an MBO include:

• Your negotiating counter-party is a known quantity (albeit this may not always be a good thing!)
• No requirement to “find” a purchaser or pay any kind of referral fee
• Reduced due diligence and requirement for detailed warranties (based on the buyer(s) having an existing working knowledge of the company)
• More flexible funding  options, often using a combination of external borrowing, cash in the company and 'loan notes'
• Continuity for the business and its employees, customers and suppliers.

Key disadvantages include:

• Cashflow – typically the buyers in these circumstances are unable to fund (whether themselves or from borrowing) the full purchase price up-front, so a substantial part of the consideration has to be deferred and paid over time
• It can be more difficult from an emotional/personal perspective to “play hardball” and maximise your returns when negotiating with friends, family or close business associates
• Where an MBO is “Plan B” after an attempt to set up an external sale has failed, then the management team are likely to be aware of this – and may therefore take a view on perceived weakness of your negotiating position.

Of course, where the management team are family members, there can sometimes be a desire to gift rather than sell the business (or part of it) to them. It is essential in such circumstances that you obtain not only corporate advice around the mechanics of the transaction, but also detailed tax and estate planning advice to ensure that neither you nor the family members end up with an unexpected tax bill.

The Corporate Team at Sills & Betteridge have a huge depth and breadth of experience of company sales and purchases, ranging from owner-managed SME businesses to large national and international corporate groups. Please contact Euan McLaughlin on emclaughlin@sillslegal.co.uk or 01522 700490 if you would like to discuss your situation and options.