Management Buy-Outs - Good or Bad?

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Management Buy-Outs or MBO's often appear to be a simple way out for selling a business but as with every exit route, there are both advantages and disadvantages. Birmingham based Broker, Roger Smith of Stirling, points out some of the issues to be considered.

Roger Smith

The starting point is a clear understanding as to whether or not the management team will have the appetite, ambition and leadership capability to grow the business.

Traditionally, less than one in five business owners would consider selling their businesses to their management team and usually for good reasons – Management Buy Outs (MBO’s) needs careful thought and planning. However, things are changing as since 2008, MBO’s have become more popular with a number of key advantages, which must be weighed up against the potential pitfalls.

So what are the advantages of an MBO? Rather than have to go to the market place, the buyer has instantly been found and confidentiality can easily be contained in-house, which is a great starting point. The balance of power can be transferred steadily and the business can continue with minimum disruption with people who are more likely to care about the history and who can be trusted in maintaining the legacy of the current and previous owners. The risk involved in a relationship change can therefore be minimised.

As with most things, there is a potential down-side, starting off with a market of one. A trade sale could have half a dozen potential purchasers, where an offer price could be double that of others for strategic reasons. Funding may be an issue with MBO’s, whereas trade buyers would need proof of funding, normally before negotiations even get started. Should discussions get under way for an MBO then there could be the risk of the management team not keeping their eye on the ball or just as bad, a demotivated management team, should the deal fall through.

According to Roger Smith, owner of Stirling, "The starting point is a clear understanding as to whether or not the management team will have the appetite, ambition and leadership capability to grow the business, followed by access to finance, as otherwise it’s no deal!" Specialist help and advice should be sought to ensure that a succession plan is carefully implemented so that a flexible, staged exit can be managed, ensuring that sensitive issues and individual aspirations can be dealt with. A succession plan will also ensure that the business is made as attractive as possible in order to achieve the necessary finance and of course, the owner’s asking price.

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Roger Smith

Roger Smith
@StirlingBiz
since: 06/2009
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