Management buyouts: top tips for a successful MBO

This article provides some top tips on the key issues to consider when deciding whether an MBO suits your business.

1. Preparation is key

One of the first steps to a successful management buyout (MBO) is to ensure the management team transition has begun before the formal MBO process starts.

An experienced and commercially-minded management team is essential for the business's future success - and to ensure the transaction is attractive to any third-party investors.

The management team should understand the whole business, for example, finances, HR, legal, operations, sales and marketing. 

Owners will sometimes look to put a confidentiality agreement (non-disclosure agreement or NDA) in place early in the discussions before the management team seeks outside advice. 

The MBO process shouldn't throw up any skeletons in the closet, as the management team should already know the company inside out and have a strong track record in running the business.

2. Enlist the help of professionals

The MBO process is highly complex, and the owners and the buyers need to seek expert advice. MBOs typically require corporate finance and tax advisors to help negotiate and structure the deal, in addition to specialist legal expertise.

Ensuring you receive professional legal and financial guidance from the start of the process will put you in a stronger position to complete the deal and prevent disputes. A strong support team will be able to provide you with answers to any questions about the MBO process and protect your interests.

3. Achieve a fair valuation

The involvement of third-party specialists is essential in establishing a fair valuation for the business. The valuation is often the main stumbling block in MBOs, and it is crucial for all parties to feel they are being compensated fairly and achieving value. 

In many cases, an outside buyer could potentially offer more for the business, so owners need to weigh this up against the benefits of selling to the existing management team.

4. Ensure you have secured funding

Funding an MBO is another area where deals break down - so it is essential to secure this early. The management team will often fund the buyout with a portion of their own capital, but additional third-party funding is required in almost all cases.

Lenders and investors will need to see that the business is profitable, has a steady cash flow and growth potential, and can operate successfully once the existing owner has exited.

Private equity and debt are still the most common way MBOs are funded, but your financial advisors will help you explore other options that could be available.

The way you source financing can make a significant difference to the company's future success. It is important to remember that third-party funders typically require robust warranties and indemnities to protect their investment.

5. Be careful to avoid employment law issues

Owners need to remember that the management team are employees first and potential buyers second. 

Transitioning from manager to business owner is not always a straightforward process, and a poorly managed or aborted MBO can negatively impact business operations and relationships.

The MBO process can be long and gruelling, with significant pressure on management teams and employees. If there is a breakdown in the process, it is not uncommon for disputes to arise.

The MBO shouldn't become a distraction from the team's day-to-day responsibilities within the business, including complying with any director's duties imposed by law.

Solicitors can advise you on all aspects of employment law, assisting with any issues that arise in the workplace during or after employment.

6. Don't underestimate the importance of a shareholders' agreement

Putting a shareholders' agreement in place at the start allows you to set out how you want your company to be run - and reduces the potential for future disputes and disagreements.

Typically, a "Newco" is established to purchase the shares/assets of the existing company, with the shares held by the management team and any investors following the MBO completion. 

The shareholders' agreement will regulate how the management team and investors work together and what happens if a shareholder exits the business following the MBO.

Your solicitor will help customise your shareholders' agreement and make it relevant to your company, encompassing all potential scenarios that your business may encounter as it grows.

7. Don't forget to plan for life after the MBO - including the exit strategy

Getting an MBO over the line can require a lot of discussions, meetings and negotiations - but it's essential also to set aside time to plan for the future.

Consideration needs to be given to the role of the owner post-closing. For most business owners selling their business is a once in a lifetime event, and for many, it is a very challenging experience. 

Lenders often like to see the owners continued involvement in the business - especially if it helps with any market-related concerns about the company post-completion.

Conversely, it may be destabilising to have the former owner still involved while the new owners implement essential changes.

From the outset, the new owners will need to have a clear long term strategy - from the day-to-day running of operations to the eventual exit route for the MBO team and its investors.

Contact our MBO solicitors

You may not be thinking of selling your business right now, but it's never too early to prepare for the future.

Our corporate solicitors understand that your business is unique. That's why we'll take the time to get to know you, your company, and your MBO requirements so we can deliver tailor-made legal solutions that are right for you.

We have solicitors in London, Brighton, Eastbourne, Hastings, and Uckfield, and we work with clients across the UK.