What Is Management Buyout?
Management Buyout (MBO), as its name suggests, is nothing but a form of acquisition process under which either a large part or all of the company is bought or acquired by the company’s existing managers. MBO was originated mainly in the United States and hit UK first before spreading its wings throughout rest of the Europe. In the case of management buyout, the management team is very much likely to form the buyout team and thus the interest of the buying team stays aligned with the investors seeking to invest in the buyout. Management Buy-Out has gained popularity in very little time and has become one of the most popular and rewarding methods for running a business, especially in the United Kingdom, mainly because it offers an interesting opportunity to shift from being an employee towards the ownership in your own company.
However, where Management Buy-Out could be rewarding by upgrading your position from an employee to a stakeholder, it has its own share of pressures to handle, because it takes nothing but the ultimate courage to bid farewell to the security and comfort that comes along with the employee status and to face the challenges of ownership and independent accountability and thus Management Buy-Out is fairly demanding in its own ways. Before you go ahead and opt for the Management Buy-Out, it is important to make sure that you avoid making following mistakes while planning for the same:
Common Mistakes While Planning Management Buyout
- Don’t get confused between ownership and employment status: This is where most of the managers fail to understand the very concept of Management Buy-Out. When you invest the same amount of money as the buying team, you might feel that you are at par with them when it comes to making decisions, and it’s quite fair to think that way. However, that’s not how the real world works and in order to run the business successfully, there cannot be too many leaders giving their decisions individually. So, yes, as a part of Management Buy-Out team, you will get the benefits of a shareholder, but that’s about it. You will always be an employee first and a shareholder second.
- Avoid wrong mix of financing: The government of United Kingdom offers you various sources of financing such as banks, term lenders, private equity, vendor financing, subordinated debt providers etc and chances are fairly high that you might be willing to take the cheapest and easiest financing option i.e. banks; because they are the cheapest form of financing. However, while you weigh your options, it is important to consider and run through your options for financial “what-if” scenarios.
- Study and understand your financial partners: If have opted for more than one financial partners in order to be a part of Management Buy-Out, it is very important to understand each and every financial partners involved because each one of them comes with their unique rules of engagement and thus becomes imperative on your part to understand what each of them will and will not do. Also it is important on your part to treat all your financial partners with openness, honesty and disclosure. The reason why it is important to understand your financial partners is because if you miss out on this step, you will learn it the hard way i.e. you cannot expect your private equity partners to behave like your banker.
- Spend time on the Shareholders Agreement: As mentioned above, when you opt for Management Buy-Out, you make a transition from being an employee to a shareholder, and while you step in the shoes of a shareholder, it is important for you to read and understand the Shareholders Agreement because in all probability, you will not never come across a document more important than that. A well thought and well crafted Shareholders Agreement will mention and include all possible “What If” scenarios such as course of action if someone gets sick or dies (with or without cause). In order to have a successful Management Buy-Out, it is important to get and address the pressing issues well in advance.
- Deal key issues honestly: For a Management Buy-Out to be successful, it is important to deal with the key issues on war footing because while addressing the key issues, if you find fault lines with the management, then they will be all out in open and in case there is not fault lines with the management, then you can work out on a new strategy.
- Handle the deal wisely: While Management Buy-Out can be a financial shortcut to success, it is quite rare that it turns out to be smooth and straight forward. With every business fallout, there are a lot of emotions attached to it and thus the chances of getting the negotiations derailed are quite high. Also, the managers are too engrossed in getting through the deal and in that process they miss the ball i.e. they lose the focus from the business and as a result of which the business starts to deteriorate. It is always better to take the help of a well-reputed advisor who can ensure that you remain focus on your business operations while he or she takes care of the deal.
- Understand deal-breaker issues: As mentioned above, Management Buy-Out is not as smooth a process as it sounds to be and if you haven’t done your part well, you might get caught by the unexpected deal-breaker issues, such as:
- Managers pulling out of the Management Buy-Out team at the last moment;
- One of your financial partners have expressed his inability to finance you i.e. you both have not reached a mutual consent on the terms of each other’s expectations;
- Chances are there that the financial investors might change the terms of their part of the deal;
- Unexpected deal costs such as legal fees, making it difficult for you to close the deal with the current financing.
- Take tough decisions: If you have managed to complete the Management Buy-Out, it is up to you to decide the fate of your business and in order to ensure that your business continues to sail in the right direction, at times you have to take tough calls. For example: you might have to take a decision on the downsizing of the business, if that’s the need of the hour.
- Keep a track of time: While being a part of Management Buy-Out team can be very enticing and you are very tempted to go out of your way to arrange the required finances, it is important to understand and estimate the time it would need for you to pay off your debt. It is very important for you to enter into an Management Buy-Out with your eyes open and a good way to do this is to start with a locking period of 5 years.
- Invest in an advisor: As mentioned above, in the process of closing on the deal, chances of you loosing the focus from your business operations is quite high, which is for sure not a very desirable trait to have. There is no dearth of good and pro- Management Buy-Out advisors out there in the market who can help you at every step, i.e. from selecting the right financial partners to have a better understanding of their expectations etc.
Planning Management Buyout Key Factors:
Apart from working on the above mentioned points, it is also important to keep in mind the following key factors when considering the Management Buy-Out:
- One of the most important points you must consider is if the owner is willing to sell or not. In most of the cases, the owner sells the company or a large part of the same, but has not accepted the same emotionally, and is often the main stumbling block.
- If you want to pull off an Management Buy-Out successfully, then you must work on building a strong relationship with the owner, because the later wants to sell his company to the manager, so it makes more sense for you, as a manager to establish a good bond with him.
- Before you go ahead and start working on and selecting your financial partners, you must first run a check if the business in picture is viable and capable of supporting outside finance.
A Management Buy-Out process is not an overnight process and it develops gradually i.e. the process begins much before the day actual transaction happens, because firstly for an owner to sell his company either as a part or in whole, he has to take tax advice at least two years in advance for the succession and secondly and more importantly, the management team i.e. Management Buy-Out team will take some time to progress on taking more responsibility. Also if you are looking to sell up and considering the Management Buy-Out option, then you need to establish a fair valuation that is reasonable for starters, and as per the expectation of the owner.