Is a deferred MBO the right route for your exit?

27 October 2021

Is a deferred MBO the right route for your exit?

After a year of turmoil we’re seeing more owner managers consider whether now is the right time to start winding down and looking at their exit plans.

One of the most common exit routes is a management buyout. The strategy allows owner managers a level of confidence and control, knowing that their organisation is safe in the hands of a team they already know and trust, whilst also offering the same team an invaluable opportunity to take the reigns of the business.

Whilst MBOs are often the least disruptive exit route, they do require personal financial input from your management team, which can be a sticking point, or in some cases, deter the acquisition entirely. This is where a deferred management buyout could be the answer you’re looking for.

What is a deferred management buyout (DMBO)?

Unlike a traditional MBO, a deferred management buyout allows your team to acquire the business without inputting their own personal funds.

The strategy involves setting up a new company to acquire the existing business, wherein your management team will take on role of the directors and shareholders. When the acquisition is completed, all of the cash in the original business (except from a pre-agreed amount, which will be used for working capital) will be paid to you, as the vendor.

The remaining balance of your consideration is by loans notes, which can be paid over an extended period of time, with the flexibility to allow accelerated payments if cashflow exceeds a pre-agreed level. These loan notes provide income over time on top of the capital repayment, and can also attract interest which is then paid to you.

But it is worth keeping in mind that extended payment terms need to be cleared by HMRC, to ensure they are taxed correctly. And as the seller, you would remain as minority shareholder, giving you the ability to potentially block decisions which could impact the new company’s ability to redeem loan notes.

Is it the right route for you?

Unfortunately, this isn’t a yes or no answer – whether it’s a trade sale, MBO or asset sale, your exit strategy has to be right for yourself, your business and your team.

That being said, if you’re in a healthy financial position, looking for a quick exit and you don’t necessarily need the sales consideration straight away, a DMBO could be the perfect solution. It’s also more likely to be an appropriate route if your business has high cash balances and very few liabilities, with stable and high levels of income.

Although DMBOs come with a greater level of risk, the rewards can be greater too – with returns up to 30% higher than a traditional MBO.

Supporting you with your exit plan

Preparing to leave a business is never a decision an owner takes lightly, and it’s natural to want to ensure that you’re getting the best outcomes possible for your business, so making sure you have the right advisor by your side is key.

Our Corporate Finance team can help to maximise the value of your exit strategy to its true potential, and are here to support you throughout the entire process. Get in touch to see how we can support you.