What is a management buyout (MBO) and how does it work?

What is a management buyout?

A management buyout (or MBO) is a complex transaction where a company's management team purchases the business they run from the existing owners - often with the assistance of external parties such as credited lenders or private equity funds. 

In recent years, MBOs have become a popular succession route for owners looking to exit a business or parent companies wanting to dispose of a non-core business.

One of the main advantages of an MBO is that there is no need for the business owner to find an outside buyer. It can be financially rewarding and offer enhanced business continuity by selling the whole company or a controlling stake to the management team.

An MBO can also work well when some owners wish to exit, but others want to continue in their roles, as the flexibility can accommodate different shareholder agendas.

How does a management buyout differ from a management buy-in?

It is important to understand the difference between an management buyout (MBO) and a management buy-in (MBI). An MBO is a purchase by the firm's existing management team. In contrast, an MBI occurs when a team from outside the company raises the necessary finance to buy the business and becomes the company's new management.

The main advantage of an MBO over an MBI is that the management team planning the acquisition are familiar with the company and offer business continuity, with no transitional period required.

Is a management buyout a good way to sell your business?

For business owners who have grown a successful company over many years but don't have a succession plan in place, an MBO can offer an attractive option.

MBOs are focused on enhancing the growth potential of a business, offering greater security to employees compared to a sale to an industry competitor who may focus on cost savings and streamlining operations.

• Business continuity
• Confidential and controlled sale process
• Compensate management team with equity stakes
• Lower costs than a trade sale
• Simplified due diligence process
• Typically lower risk

The MBO route will also provide a platform for the management team to take ownership of a company they already know inside out. 

However, transitioning from manager to business owner is not always a straightforward process, and a poorly managed MBO can negatively impact business operations.

Competing stakeholder interests often make management buyouts a highly complex transaction, and it is essential for all parties to feel they are being compensated fairly and achieving value. 

The importance of legal advice

Engaging specialist legal advice is always essential to ensure a smooth process. A successful MBO is where the management team and the current owners work collaboratively to reach a positive outcome for all stakeholders.

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

An experienced legal team can help you agree on a balanced set of terms and give you the best chance of closing the deal, with advice on a broad range of legal areas, including:

• Confidentiality agreements
• Conflicts of interest
• Due diligence
• Employment law advice
• Formation of the new company
• Heads of terms
• Indemnities
• Investment agreements
• Negotiating terms
• Negotiating warranties
• Restrictive covenants
• Share purchase agreements (SPA)
• Shareholder agreements 

How long does an MBO take to complete?

The management buyout process is complex and takes time and expertise to complete successfully. MBOs vary widely in timescale, but a typical process might last around six to nine months.  

In addition to the required legal expertise, the management team needs to secure the necessary funding to ensure that the business has enough working capital to succeed and grow. 

The MRO process requires working closely with financial advisors and funding institutions, for example, banks for debt funding and private equity firms for equity funding, which adds time to the process.

If you are thinking of buying or selling a business via a management buyout, below are some of the key questions to consider.

Ten essential questions for the seller to consider

1. Have you sought specialist legal and financial advice?
    
2. Is there a strong management team with the skills and experience to fill the leadership and business-critical positions?
    
3. Does the management team have the required financial backing?
    
4. Are you prepared to accept a lower price than could potentially be achieved by selling the business elsewhere?
    
5. Are you looking to be repaid over time? Or would you prefer a straightforward sale?
    
6. Have you considered the tax implications of the sale?
    
7. Are you willing to dedicate time and energy to ensuring the deal is a success?
    
8. How do you envisage your role in the post-sale period?
    
9. Have you thought of an alternative plan if the sale to the management team fails?
    
10. What will be the impact of an unsuccessful MBO in terms of your relationship with the management team?
     

Ten essential questions for the management team to consider

1. Have you sought specialist legal and financial advice?
    
2. Does the company represent a sound investment with good growth potential?
    
3. Is the owner willing to sell?
    
4. Do you require financial backing, and have you explored the various options?
    
5. Are you comfortable with the financial risks involved, and have you considered the tax implications?
    
6. How are you going to pay the legal and financial advisor fees?
    
7. Does your MBO team have the skills and experience to be business owners?
    
8. Are you prepared to dedicate time to the MBO process while continuing to manage your day-to-day responsibilities?
    
9. Have you considered your long term goals for the business, including an eventual exit strategy?
    
10. Have you considered how an unsuccessful MBO will impact you?
     

Contact our MBO solicitors

You may not be thinking of starting an MBO 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 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.