It seems as close to an ideal solution as you can get: A company owner wants to call it a day, but ensure that their “baby” remains in good hands. Who better to sell to than members of their management team? They know the product, the people and how the company works. Risk minimised, chances of success maximised. Perfect. Well, perhaps…
Management Buy-Outs (MBOs) have their advantages. But they can have pitfalls that can trip up even the best managers.
What’s the main risk?
Managers working in a business are often very skilled and experienced in their role but many have had limited exposure to actually running all aspects of the business. Many think they fully understand it but few do.
For example, rarely do all members of an MBO team really understand their company accounts, operational funding requirements or cashflow. They didn’t need to, because until then they weren’t the ones paying the bills. Suddenly they are asked to run a business and can feel exposed about what is to come and what is required of them.
The six month scenario
Many hit what I call the ‘six-month scenario’, although it can hit at any time after an MBO. The initial bedding-in period has ended and the funding buffer has been eroded, then something will happen. It could be a sales challenge, an operational challenge, or a timing issue. The problem is compounded as you are often committed to funding requirements and have agreed to certain targets with the bank.
I know this six-month scenario from personal experience. I bought a business a few years ago and had a problem when a director with 20 years’ experience decided to buy €1 million of stock that had a slow turnover rate. She got it for a good price but she didn’t understand the implication of what that cost me. It gave me a big cashflow problem as I was committed to my funders’ lending terms.
1) Get an advisor for the long haul, not one who’s interest ends on deal day – preferably one who has actually been through the process themselves. They can give practical advice.
2) Don’t assume you know everything about your business. Not just what your business does, but every bit of your process flow – getting cash in and out. Understand where the pinch points are and how to mitigate risks.
3) Anyone undertaking an MBO should think what they intend to do three years down the road: Always have a plan against which you can check your decisions.
The good news is that most MBOs do prosper. Funders are more comfortable with them than with trade sales. The current trend of many vendors taking a deferred payment of some of the sale price means the cash required for completing the deal is less and reduces the pressure on the company post deal.
Just make sure you get professional advice from someone with experience who can be there to help support the decisions you and your management team make.
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