"Never forget that a MBO can be tricky."

Jim Shaw
CEO & Founder, Shaw & Co

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Firstly, it’s important to define what we mean by a management buyout. It is usually defined as a management team agreeing to buy the business from the owner. However, sometimes a sale of a stake to private equity, wherein the existing owner is invited to co-invest, is also referred to as an MBO but here the dynamics are very different. Herein we are considering the former!

Never forget that a MBO can be tricky. As you have a buyer and a seller who work in the same company, reaching an agreement in terms of valuation can prove to be particularly challenging. Both parties may consider that they have some leverage and, if not managed carefully, this can become problematic.

If done properly, an MBO will provide the owners with an elegant way of extracting value while passing the baton (and future equity uplift) to the management team who were very likely a key component in the success of the business and are probably the best team to take it forward onto the next stage of its evolution. It can also enable an owner to step back gradually, selling the business while still retaining some of the equity.

Here are five key points to keep in mind when negotiating an MBO deal:

1 - Define the Vendor’s Role

It is important that the vendor’s role is clearly defined – they are the seller here, but they are also the business owner and potentially its founder and hold ultimate responsibility for the business until such time as it is sold. They need to tightly control the process to obtain the right offer and funding package to support it whilst protecting the value of their asset.

2 - Temper Financial Expectations

In general, price tends to be slightly lower as the vendor will not be taking the business to market and running a competitive bidding process. Private equity involvement can sometimes help bump up the numbers but equally if the vendor finds themselves in a debt backed MBO they may have to wait a few years for their money.

3 - Be Patient

An MBO is a transaction in which a company is purchased by management using their own cash resources, debt, external equity, vendor roll over (deferred consideration), or a combination of each, so it can be more complex than a sale or acquisition. It is also an extremely delicate transaction. It places the management team and shareholders in the opposing camps of buyer and seller. If handled incorrectly, an unsuccessful transaction can have a long- term negative impact on the business.

4 - Take Me to Your Leader

An MBO needs a clear leader in the management team. While agreeing on who the CEO should be and making sure they are strong enough is not an easy task, it is something that must be done well before an MBO is realistic. It is important to be able to present a credible management team to both the market and potential funders. The likelihood is that this will be their first MBO transaction (and probably their last) so getting it right first time will be critical for success.

5 - Don’t Forget the Day Job

The amount of distraction the MBO process can cause should not be underestimated. Key management still have their ‘day job’, while trying to juggle this with negotiating a good deal. This often creates tension between the MBO team and owners and having a corporate finance adviser who is able to act as a ‘circuit-breaker’ can alleviate much of this stress while helping negotiate, structure and fund a deal that is not only acceptable to all parties, but is also fundable.

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If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here