Simple advice on how to assess and plan Management Buyouts (MBO) from the team at DSG Chartered Accountants.

If you’re working in a family owned or owner-managed business and there is no obvious long-term family succession, you would be forgiven for thinking that a trade sale is the most likely way out for the shareholders or business owners. You might have a concern that the new owners will relocate the business, thereby uprooting you and your family, or potentially bring their own people in to run things such that they won’t have a need for your skills. Management Buyouts (MBO) may be the answer.

Well, there is a potential solution. You and your colleagues may well stand as a credible management team who can take the business forward under your ownership through a management buyout from the current owners.  Whilst this will require hard work, and focused effort, you could potentially create value for yourselves as well as protect, and hopefully enhance, the business you have been managing with the owners.

You can start a conversation with an owner when they have indicated a desire to exit or retire, or they’re spending less time in the business means you are effectively already running the show.

Getting advice early on is key – don’t assume you can’t afford the business!

Funds are potentially available from the owner(s) – most management buyout deals will include an element of deferred consideration (with security) to pay the owner a balance of monies over time to spread the burden. Other potential sources include the bank, asset-backed lenders, venture capital and/or loan funds, but you will also need to commit some funds of your own.  After all, if you won’t commit, why should anyone else?

The value may ultimately come down to what is affordable.  There is no point in gearing the company up to a level to satisfy an owner’s expectation of value if the debt can’t be serviced or where there is nothing left to reward you adequately going forward – most funders will agree to a reasonable level of management remuneration but they want to be repaid within a sensible, timeframe.

Due diligence and proper process are key for both parties when preparing Management Buyouts (MBO). Therefore you should not underestimate the time needed away from the business to do the buyout deal.  Meetings and discussions will often take place off-site or outside of normal hours to maintain confidentiality, and you still need to do the day job.  Business performance can dip during the process and immediately afterwards as those involved breathe a sigh of relief at having completed the deal.

Finally, don’t assume it will be a ‘friendly deal’ – the owner might have unreasonable expectations of value (if they haven’t sought advice) or they might have a willingness to help you get a deal done.

In any event, get good independent advice from someone who is familiar with the process before you get too involved in discussions.  You will need both independent corporate finance, and legal advice. Any potential funders will expect this and the owner’s advisors will be conflicted from advising you.

However the conversation starts, with proper advice, it can end with satisfaction on both sides. If you’d like to learn more about how DSG can help with your business, contact a member of our team today.

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