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Corporate finance: Do management buyouts work?

By Dan Teuton
8 November 2017

For many managers, a management buyout (MBO) is an exciting, perhaps courageous, move to face the challenges of ownership of your own company, writes Amanda Brockwell, partner at Southampton and Winchester law firm Paris Smith

Buying a company through an MBO can be a short cut to financial success; the risk is lower than buying a company you know nothing about and financing can be easier to obtain. The waiting period for the return on your investment is shorter than starting a business from scratch.

However, a fair number of management buyouts fail. Do not underestimate the pressures on management, colleagues, family and friends, as well as pressure which can be brought to bear by funders. 

The key to a successful management buyout lies in the quality of the management. This will include qualities which allow a management buyout team to recognise that even whilst a shareholder in the company, the management team still have to perform as employees and have a strong and capable leader. 

The selection of the right finance partner or partners to fund the MBO is also important.  Banks are the cheapest form of finance, but they have strict rules that MBO teams have to live with, while private equity is expensive but also a little more patient.

The chemistry between funders and MBO team is very important, so going for the cheapest option is not always the best approach; whilst this may allow you to retain most of the equity for yourself, you also need to ensure that the company can withstand the various bumps along the road which will inevitably occur and for there to be sufficient money and cashflow to be able to absorb this.

Funders' key concerns will be the quality of the management team - they are looking for a strong, ambitious and coherent team of managers and a team with a clear vision. 

Companies will need to start having regular, structured board meetings with good board papers and corporate governance - which is sometimes a bit of a learning curve for management teams who come from an owner-managed background, and funders will often ask to have representatives sitting on the board; so management teams need to be prepared to be challenged by those board members in a way that they may not have seen in the past. 

It is also key to the smooth running of a deal, post-buyout, that the management team is candid and honest about the key issues in its business as time goes on. The MBO team must operate as a team that can adapt to the new environment to unlock the upside revenue and accomplish other key objectives. Again, a weaker team will mean that fault lines are often exposed.

Managers also need to focus beyond the completion of the deal - this is just the beginning of the story and the journey really begins with the growth of the company after the deal.

MBO teams also need to go into deals with their eyes open; most financial partners and backers are expected to be paid out before the MBO team see any capital gain. A good rule of thumb is that you should anticipate your money is to be locked in for at least five years, assuming you remain with the company.

For the business owner it is often a chance to retire and unlock the wealth in the business.  From the perspective of management, MBOs provide an opportunity to gain direct share ownership of their business and create an entrepreneurial environment.

The selection of funders is absolutely key to the success, and from a funders perspective it is the quality and drive of the management team which is of most importance.



Details: Amanda Brockwell, 01962 677808 [email protected]

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