Management buy outs or MBOs as they are often known, are in essence when a management team buys the business or part of the business within which they are already employed. They are a popular way for business owners to exit a business, passing ownership and control to a team they know.
An MBO allows the vendors to sell the company without the threat of being acquired by a competitor whilst at the same time enabling the owners to reward the management team for historic service to the business. However, it is essential that the right team are selected to undertake the buy out, with a wide range of skills.
A successful MBO will require a number of factors in addition to the right team, including a vendor willing to accept a reasonable price with an appropriate deal structure. Agreeing the deal is a big step that requires overcoming. However, if a deal can be MBOs can prove to be a successful and often less stressful process for all parties involved.
Selecting the Team
A critical factor in any successful MBO is a team with a good mixture of skills, experience and understanding of the business operations and the key fundamentals that have contributed to its historic performance.
Funders pay particular attention to the make up of an MBO team to confirm they have the right level of commitment and a desire and vision to develop the business. Involvement in running the business prior to an acquisition is often beneficial reducing the reliance on the vendors and allowing any key relationships to be taken on by the MBO team.
A team that has some personal funds or assets to help fund a deal will also be of significant benefit in helping the structure of a deal, whilst providing funders with confidence that the team are willing to back themselves.
Agreeing the Deal
Even where there is a willing buyer and a willing seller, the final structure of a deal requires discussion and agreement. There will be certain elements that require negotiation such as terms attaching to deferred consideration and consultancy arrangements for the vendor.
It can often be difficult for the management team and the vendor to discuss key matters without emotion coming to the fore. Even though both parties are fully committed to agreeing a deal, they both have disparate requirements. Clearly involving advisers who do not have the emotional attachment but are acting solely for you, enables open discussions to be held and any disagreements to be settled.
One key role that an adviser has in the process is to consider the overall deal from their client’s view point. It does not necessarily meant it is the best deal in terms of actual amounts payable or receivable, but for example is it the right deal in regard to funding structure or on-going support from the vendor? All elements of the deal require attention as they will be influential when trying to secure third party funding to execute the deal.
Funding the Deal
There are a variety of sources for funding a MBO, ranging from management equity to earn outs where consideration is effectively paid out of future profits. Management teams will invariably be required to invest some personal monies in the deal but this may not necessarily be vast amounts. It will invariably depend upon an individual’s circumstances and may well result in a guarantee being provided rather than just actual cash.
Ensuring the deal structure and overall consideration are fundamentally supported by the business proposition will give an increased probability of attracting funding from banks, asset based lenders and private equity. The type of funding required will be determined by the level of funding required, the availability of security within a business and the actual trading activities of the business. All options should be considered before being dismissed as not appropriate.
The chance of an MBO successfully raising the funds required is greatly enhanced by the vendor agreeing to an element of deferred consideration. Not only does this reduce the amount of new finance required but also gives external funders and the MBO team confidence that the vendor is willing to leave some monies within the business which they are no longer in charge of running.
Earn outs are where the vendor has some deferred consideration due to them but this is only payable on the achievement of certain criteria and goals by the business following completion of the deal. Due to the added risk of this structure, vendors often require the potential for an uplift in the amount of consideration payable if the agreed targets are met or surpassed.
Structuring the Deal
The deal structure will invariably be determined by the availability of funding and the requirements set by the chosen financiers. Ensuring they are willing to support the deal structure that has been proposed is essential to ensure nothing is agreed between the vendor and MBO team, which transpires to be unsupportable from a funding perspective. Renegotiating a deal that has already been agreed can lead to an uncomfortable situation that can be avoided.
All parties involved in the transaction will require comfort that the structure can be readily funded by the business without the requirement for exceptional performances by the business post deal. There will invariably be an element of negotiation required between the vendor and management team to close the gap on deemed valuations of the business. Allowing these discussions to be carried out with the knowledge of the funding available to do the deal, ensures time and money is not wasted on trying to achieve the unattainable.