What makes for a successful management buyout process?


Last updated on February 28th, 2023 at 08:26 am

A management buyout (MBO) has been a popular form of transferring the ownership of a business since the 1980s. The smooth transition of the incumbent management taking ownership of the business usually makes it preferable to external investors buying it out. Below, we explore how an MBO works and how it can be successful.

What is the management buyout process and how does it work?

A management buyout occurs when the existing management of the company acquires a controlling stake in the business. Here, the management team will pool together their resources – and potentially raise funding – to bank on the potential of the company and become the owners. The management board should understand the business inside out and be fully prepared to execute the deal when the opportunity arises.

The benefits of a management buyout

An MBO offers plenty of benefits – if the takeover is carried out smoothly, it can work successfully for a business. For a start, there’s less upheaval: the management team should have an intimate understanding of the business, and daily operations should continue to run smoothly after the takeover. What’s more, an MBO is usually faster than selling to external parties. Usually, there’s an existing relationship between management and the owners. As a result, this added trust and familiarity should help facilitate a smoother deal between the two parties.

Finally, an MBO can help keep confidential business information in-house. If you’re negotiating with external parties, it’s necessary to divulge confidential information to build confidence and secure a deal. However, if the deal falls apart, you risk important information getting leaked. Fortunately, with an MBO, there’s little risk of key trading information leaving the business.

How are management buyouts funded?

Ideally, an MBO will be funded solely by the management team. However, this will require the team to have significant capital as a group or a low valuation of the business. Quite often, especially in larger companies, the management team will have to search for external funding to help them take over the business. This could come in the form of investors, although this carries the risk of investor priorities influencing the future of the business.

Alternatively, the management team could consider bank loans to help finance the business. This can avoid ceding control to investors but paying back debt with interest could limit the future growth of the company. Both of these situations highlight the drawbacks of an MBO. Other forms of funding an MBO include asset finance which enables businesses to leverage against the assets in the company, usually property, stocks etc.

Vendor loan notes where the sellershelp fund the transition and leave some of their consideration in the company as loan notes to be repaid over time. Private equity is another viable option for funding and MBO. A successful MBO process will be quick and efficient, allowing a company to grow under familiar ownership. By opting for this type of deal, your company can often look forward to a strong and stable future

The Tax consequences of a management buy out

Dependent on the opposed MBO structure and funding there can be various tax consequences that both the vendor and the purchasing management team will need to understand and be aware of. Key variables that will need to be considered include: Is the proposed MBO a share or asset purchase? Will there be any tax liabilities for management? What are the VAT considerations?

Is stamp duty payable? Are there any further restructuring requirements that form part of the proposed MBO? Or What are the expected exit options for the purchasing management team in the future. The earlier you seek tax advice the better it is.

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