A MBO (Management Buyout) is a type of transaction in which a company’s existing management team acquires the company they currently manage, or seeks to acquire a significant stake. Financing for the buyout is typically sourced from the management team’s personal resources, private equity, vendor loans (from the current owners), or bank debt. In an MBO transaction, the management team believes they can use their expertise and experience to grow the business and enhance its overall operations.
How long does the MBO process take?
The MBO process typically takes around 6 to 9 months, depending on several factors, such as the specifics of the deal and the size of the business. The management team aims to generate a return on investment (ROI) by increasing the value of the business at a faster rate than the growth of its debt burden. This in turn increases the value of their shares in the business.
Why choose an MBO?
An MBO is an attractive option for businesses with retiring owners, as it allows them to exit while passing on responsibility to a trusted management team. It is also a viable option for motivated individuals within the management team who have a clear vision for the future direction of the business.
Key considerations of an MBO
- Does the company have a strong track record of profitability?
- Is there a strong management team?
- Does the owner have realistic price expectations?
- Can the management team put up a relatively small amount of ‘hurt money’? (Note: we often see this funded via transaction bonuses.)
Key considerations for EOTs
An Employee Ownership Trust (EOT) may be another option to consider for business owners if they feel as though a Management Buyouts process is not a suitable exit strategy. While an EOT offers attractive tax incentives for exiting shareholders, it may provide weaker direct incentives for the incoming management team.
