Conversations that pre-empt a management buyout often start with an owner indicating a desire to exit or retire, or spending less time on the business - meaning management is already running the show. Andrew Moss, head of corporate at Chartered Accountants DSG, give us fives top tips for anyone thinking of undertaking an MBO.
When an owner chooses to leave a business behind, many prefer to see the company pass to their existing management teams - to people they know and trust, who have grown with the company.
I’ve spent my career working closely with owner managers and entrepreneurs, looking after a portfolio of small and medium sized owner-managed business clients and advising on fund raising, sales and acquisitions in the SME sector as well as undertaking due diligence assignments for purchasers and funders.
I’ve seen how this can be a great opportunity for ambitious management teams, but it’s important to be prepared for the process – here are the most important five things to consider:
Management shouldn’t automatically assume they’re first in line to buy the business! Although they may already be running the show to some extent, and it can seem like a natural transition, owners will still want the best possible deal and inexperienced management teams may find they’re not be able to match offers from external parities.
Equally, it’s dangerous to assume it’s a ‘friendly deal’ just because they already have one foot in the door. Approaching the acquisition with as much background information as possible is key to demonstrating that they are a serious contender and more importantly, a reliable buyer. Seeking good, independent advice to ensure the process goes as smoothly as possible, is key.
Another common management misconception is that they won’t be able to afford to buy the business - but there are actually a number of funding options available to assist MBOs. The management team will need to commit some funds of their own, but other options, including funds potentially available from the vendor (deferred consideration), the bank, asset backed lenders, venture capital and other types of loans, should definitely be explored.
Don't underestimate the effect taking the time away from the business to do the deal will have on operations. Business performance can dip during the process and immediately post as everyone breathes a sigh of relief at having completed the deal.
In terms of value, the final cost may ultimately come down to what is affordable. All parties should be aware that there is very little point in gearing the company up to the point where the debt can’t be serviced or where there is nothing left to reward the management adequately going forward.