MANAGEMENT BUYOUT (MBO)

A Management Buy-Out is when a business is sold to the existing management team. Typically, management will establish a new holding company (Newco), which together with a financial institution (Venture Capitalist or Private Equity house) will purchase the shares of the target company where the management work.

An MBO usually occurs when:

• Companies sell parts of the business that are not core to their future strategy
• The existing owner-manager is looking to retire

As the existing management have inside knowledge of the business, they are in the best position to take the business forward. In many cases, selling to the management is the preferred option to the existing owner, rather than selling to a competitor. An MBO offers ambitious managers an opportunity to run their own business and benefit from their own efforts through increased remuneration and a valuable asset to sell on in the future.

The key to getting the best price when preparing a MBO is understanding the dynamics of the process and the business. As a manager looking to buy your own business, you are in a position that requires careful thought.

You need to consider and achieve all of the following goals:

• Negotiate the best price from your employer
• Compete with potential trade interest
• Find bank and venture capital funding
• Structure a deal that the business can support going forward
• Negotiate a deal with the bank and the venture capital firm
• Negotiate legal agreements with all of these parties
• Continued management of the business

The main problems for the MBO team will be securing the necessary finance, both for the acquisition and future working capital. Key success features include a sound business with solid cash flow generation, high growth prospects and an experienced management team.

What kind of funding will I need?
An MBO involves raising equity and debt funding to pay for the acquisition, as well as bank facilities for ongoing working capital. Additional finance might also be required for capital expenditure. Since creative debt funding will reduce your need to secure more expensive equity capital, you should look to maximise this first.

Note:
MBO's do not necessarily have to be multi million pound businesses. We have acted for MBO's in respect of businesses in the £500k to £5million turnover sector. Also, with access to many innovate and aggressive debt finance providers, many of our MBO's have been funded without the need for Venture Capital