Management Buy Outs (MBO) and Management Buy Ins (MBI)

As a business owner, succession planning is crucial. An ideal solution when you want to exit your company is to either allow your management team to buy the company from you or seek external buyers for your company.

Management Buy Outs (MBO) and Management Buy Ins (MBI) have many advantages because your team will be familiar with the business, it provides management consistency, there could be less risk and the deal may happen quicker.

In this blog we will give you a comprehensive guide to Management Buy Outs and Management Buy Ins.

What is the difference between a Management Buy Out and Buy In?

A Management Buy Out (MBO) is when an existing leadership team purchases your company.

A Management Buy In (MBI) is when you sell your company to an external team.

Understanding MBIs

With a Management Buy In, an outside person or team will buy or take a controlling stake in your company. They then work in or alongside the company as its new management. Often, investors for a Management Buy In will invest their own money but they may well have financial backing from other sources such as private equity finance, a bank, or other alternative lenders. A buy-in may mean that your existing management team will be replaced with new managers and/or directors.

Disadvantages of MBIs

• As the incoming team will not know much about the day-to-day running of the business, they are more likely to undergo thorough due diligence of the business before the sale.
• Due diligence means the buyer will have access to confidential and sensitive information. If they are a competitor, this can be difficult to manage.
• Buyers may demand more assurances regarding warranty and indemnity protection.
• Your existing employees may lose their jobs/roles and employees could struggle to accept a new management team.
• You may have to stay on in the business for a while to manage the handover and transition more carefully.

Disadvantages of MBIs

• Because the incoming team will not know much about the day-to-day running of the business, they are more likely to undergo thorough due diligence on the business before the sale.
• Buyers may demand more assurances regarding warranty and indemnity protection.
• Your current team may lose their jobs/roles and employees could struggle to accept a new management team.
• You may have to stay on in the business for a while to manage the handover and transition more carefully.
• Due diligence means the buyer will have access to confidential and sensitive information. If they are a competitor, this can be difficult to manage.

Understanding MBOs

For you, the existing owner, an MBO can provide a great succession plan, due to retaining continuity of leadership team and an easier process to exit.

Advantages of MBOs

• An MBO can be an attractive succession plan for the following reasons:
• The current management group can provide continuity of management.
• You won’t have to disclose sensitive management information to external parties.
• It can be a much quicker and easier process as you won’t need to externally market your company to third-party buyers.
• Negotiations about the value of the business can be easier.
• You may have an option to retain a minority stake in the company and be around to ease the transition.
• The successful completion ratio can be higher for MBIs.
• There may be reduced risk than selling to an external team.
• The current management may not dramatically change, which may mean less change and upheaval for your existing management team and employees.
• Warranties and indemnities can be much simpler for an MBO.
• You can use a future MBO as a reward for the loyalty of people who have helped you to grow the business.
• If your business is small, then an MBO can be a good option as your business may be too small to attract an external buyer.

Disadvantages of a MBOs

There can be some disadvantages of a Management Buy Out as follows:

• The current management team may be experienced in their own roles but may have limited exposure to aspects of ’running’ the company overall.
• The current team may lack time due to continuation of their current roles. They will need to use professional advisors to assist with the process.
• Your existing management team may not have the financial resources to buy the company. Therefore, you may need to negotiate terms such as deferred consideration. This means you won’t get all the proceeds from the sale immediately.
• An external buyer may be willing to pay more for your business if there are synergies with their current business or investment portfolio.
• Conversations and negotiations such as price etc. may be more difficult because of your close relationship with the team buying into the business.
• The sale may create conflict, especially if a deal fails to complete.
• There may be an issue for the team in raising enough capital to fund an MBO themselves. They will have to seek external finance.
• If you retain a stake in the business, it may be difficult to let go and allow the team to take control.

The Management Buy Out / Buy In process

A typical transaction process may look like this:

• Appointment of professional advisors.
• Business valuation.
• Feasibility and viability assessment including initial funding views (MBO).
• Marketing of the business (MBI)
• Tax planning.
• Negotiation.
• Draft and sign heads of agreement.
• Due diligence.
• Agreement on the purchase price.
• Legals.
• Covenants.
• Deal completion.

MBO funding

Financing a buyout through management equity is rare. A significant amount of money may need to be raised. External funding will often be needed via external lenders such as bank debt or a private equity firm.

Often, with a buyout, deferred consideration is requested. This means that you will be acting as a funder. This means the buyer obtains the shares or business at completion but pays part of the purchase price at a later date or dates. This may be a fixed amount, or it can be linked to the future performance of the business (this is called an ‘earn out’).

Questions to ask before a deal

Before considering a Management Buy Out or Buy In, you should ask yourself these questions:

Do you have the right management in place to take over the business?

Is your team already involved in the day-to-day management of the company?

Do they have the right mix of skills to take the company forward?

How much support will you have to provide to the new owners?

Is the transaction feasible?

Do external buyers have the credibility and finance needed to purchase your business?

Do the buyers or team have the vision and strategic skills to take the business forward?

Conclusion

A Management Buy Out or Buy In can often be an ideal solution for current business owners.

When deciding whether a Management Buy Out or Buy In is right for you and your business, planning ahead is vital.

Contact dns today for help and advice on an MBO or MBI

You should have a succession plan in place long before you want to exit your business and this should be revisited every year. Regularly review your exit strategy to put yourself in the very best position to exit your business.

We work with both owners and management teams that are planning a Management Buy In or Management Buy Out. We can provide the advice you need on exit, succession, funding, and tax planning.

For support and advice on exiting your business, contact us today on 0330 088 6686. You can also e-mail us at [email protected] .

About the author

Aman Bhardwaj
Aman Bhardwaj is the Head of dns Corporate Advisory, where he specialises in mergers and acquisitions. With over 30 successful acquisitions under his leadership, Aman has played a pivotal role in expanding dns's footprint in the accounting industry. He brings a robust academic background with a master’s degree in Economics from the University of Warwick and a bachelor’s degree in Computer Science.