Whilst transactions often take 6-12 months to complete, succession or exit planning needs to be addressed much earlier. From a large corporate group all the way to a family owned, or owner-managed businesses, arguably a Management Buy Out (MBO) – where a management team buys a business from its owner – should feature in all such plans.
The art of selling and then exiting a business includes having the ability to hand over your asset as seamlessly as possible. Such a transition requires a management team that handles all day-to-day operations. Any purchaser will require a period of continuity post transaction before an owner can truly step away; once it is accepted that the owner is genuinely surplus to requirements this can occur immediately. Furthermore, it is important that a purchaser is convinced the majority of goodwill value is inherent within the business as opposed to attributable to the seller, otherwise this would be reflected in appetite and overall value.
Both issues are fully addressed with a strong management team, and once in place there is the option of another exit route: the MBO.
The following steps will help navigate the path to a successful MBO, or any transaction:
- Organisation chart: Work out the internal structure of the business, reporting lines or divisions.
- Assemble management team: Either by promoting from within, or seeking outside experience and expertise. Typically should include heads of operations, sales and finance, but the requirement will naturally follow the organisation chart.
- Formalise monthly reporting: Monthly reporting signals that you are still keeping close tabs on business performance despite transitioning to a reduced operational role.
- Empower the management team: Trust your management team with more and more responsibility. Monthly reporting allows for regular accountability for individual and business performance.
- Document all the above: Clear lines of responsibility dictates who takes on future leadership roles, who leads in most reporting meetings and contingency arrangements.
- Make yourself redundant: If all the above is working to your satisfaction (i.e. regularly reviewing plans, milestones and checkpoints) then this provides the opportunity for more personal time, a precious commodity for any business owner. It also demonstrates that you are fully ready for a transaction and little goodwill value remains with you.
There are three typical ways to execute an MBO:
- Vendor backed: where the seller finances the transaction, by allowing payment to be settled by future profits.
- Debt backed: where a bank provides the finance for management to pay the seller.
- Private Equity backed: where private equity provides the finance for management to pay the seller, as well as taking an equity stake in the business.
Bring in external advisors: Independent professionals will be able to critically appraise all the above, ensure decisions are driven by strategy and fact, and provide expertise on valuation, legal structuring, tax and executing the transaction.
Whether you are a management team seeking to acquire an existing business, or a founder seeking to use an MBO to exit your business, our team can guide you through the transaction process, including financial due diligence, funding options, and succession planning.
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