What are the pros and cons of a management buyout (MBO)?

An MBO is essentially an owner selling to members of their business's existing management team. This can be an attractive option if you're looking to exit a business, as it presents a valuable opportunity to unlock the wealth locked up within it. However, getting the right advice is essential if you want to ensure you extract its maximum value.

However, there are some potential pitfalls to consider. We've put summed up the main pros and cons of an MBO below...

Advantages of an MBO

• It is potentially easier to agree on a value for the business, as the vendor knows the people they are negotiating with and the buyer typically knows the business.
• Negotiations with the existing management team will help to ensure management information remains within the business, allowing for a greater degree of confidentiality in comparison to a trade sale.
• The sale process is often faster than can be achieved in a trade sale.
• Warranties and indemnities in the legal sale agreement can potentially be restricted.
• The vendor will potentially have more control over the process than with a sale to a third party.
• An MBO is a good option for businesses that are often too small to attract a trade buyer.

Disadvantages of an MBO

• The business valuation may be lower than could be achieved through a trade sale as a management team may not pay for the synergies available to an external buyer.
• The management team may be very skilled at their particular role in the business but may struggle with the range of different skills required to be a ‘business owner’
• The management team may struggle to raise sufficient external funding for the deal.
• Typically the management team must inject some of its own funds. The team may not have sufficient personal wealth to do this, so, for example, may need to remortgage their home which increases their personal risk profile.
• A lack of available funding may mean a higher level of deferred consideration is required; this increases the risk to the vendor as they will not get all of their money on day 1.
• If an MBO does not proceed, this risks damage to the vendor’s relationship with their management team which may have a detrimental effect on the business going forward.

Having the right advisor can make or break an MBO deal. Ultimately, your financial advisor should ensure you have the right selling strategy, provide you with an accurate business valuation, help with the transitional period, minimise your workload, and establish a tax plan to ensure you pay the least amount of tax on exit. If you're thinking about an exit strategy or have questions about the MBO process, please feel free to contact Chris Hird.