In an MBO, the company's existing management purchases the business for a value. While MBOs can benefit both sellers and buyers, they can come with unique challenges.
The MBO Process
An MBO generally involves the sale and purchase of shares rather than assets. External buyers usually evaluate businesses based on market conditions and growth potential. In contrast, the buyer already has deep knowledge of the company and the sector, and their valuation is often based on internal performance metrics.
Frequently, a Special Purpose Vehicle (SPV) is established to purchase the shares, making the SPV the controlling shareholder. The acquisition can be financed in several ways:
Debt from banks and other lending institutions.
Deferred consideration or earn-outs, where the purchase price is paid over time based on the company’s future performance or other metrics which may allow the buyer to use money they have earned from the company to pay at a later date.
Seller loans, where the current owners provide financing to the buyers.
Equity finance loans, from private equity firms (sometimes used when banks refuse to finance) though they may require their own shares in the company in return.
Personal money from savings or other investments.
Advantages of MBOs
One of the biggest advantages of an MBO is business continuity. The buyer already understands the company’s operations and relationships and so to the outside (and from the inside) the company may look exactly the same post acquisition. Stakeholders typically appreciate the stability offered by MBOs, as business and employee relationships are preserved with little disruption.
MBOs also provide the management team with greater control to drive enhanced productivity and innovation. Once they take ownership, they have autonomy in shaping long-term strategies so they can use their expertise without needing to consult as they did before. This deeper involvement in decision-making allows for more tailored and responsive business decisions and allows them to benefit financially from the success, growth and financial performance of the company.
Not all businesses are attractive to external buyers and so an MBO may be the only option available for the existing owners and can often be beneficially structured from a tax perspective.
Challenges of MBOs
Financing remains one of the largest challenges in MBOs. Most management teams lack the capital to purchase the business outright, relying instead on external financing options. This can result in the business carrying significant debt postbuyout, which may bring about cash flow problems, limit ability to invest or manage economic downturns. Sellers may also struggle to realise the full value if they offer seller loans or deferred consideration.
The potential for internal conflict is rife since the management team negotiates the deal whilst still often being employees! As potential buyers, they will obviously want what’s best for them and are well placed to conduct their roles in a way that may downplay the company value. Employees, minority shareholders, and other stakeholders might question the fairness of the deal. Transparency throughout the process is essential to avoid potential damage.
Let’s not forget it is a hard step to go from employee to owner and it will be a struggle for some, which may ultimately harm the company.
Conclusion
With careful planning, MBOs can offer a smooth transition for owners and a successful path to ownership for management. Before considering an MBO, both sellers and buyers should seek expert legal and financial advice to ensure all stakeholders are protected.
Contact the expert corporate team at Sweeney Miller Law by emailing jess.fenwick@sweeneymiller.co.uk or calling 0345 900 5401.
www.sweeneymiller.co.uk
