Could a Management Buy Out be your route to exit?

If you’re exploring business exit strategies one of the options for an owner-managed business is a management buyout.

A management buyout (MBO) is a financial transaction where the existing management team buy out the current owner(s) of a company.   

This can be a particularly beneficial option for owner-managed businesses as it keeps an element of continuity that often leads to a smoother transitional process. However, many MBOs don’t even get started due to crucial mistakes made in the very early stages.  To help ensure a successful outcome we have listed 10 practical tips for business owners considering this option. 

1. Don’t talk about price at all in the early stages. This should come at a later date once the deal has developed into a more serious discussion.  
2. Avoid discussing the deal on company premises. Once an initial conversation has taken place, we recommend that you continue any further discussions off-site to maintain confidentiality.
3. Don’t imply job security depends on participation. The MBO should be presented as an opportunity— not an obligation.
4. Don’t exclude eligible team members. Any individual at the same management level should be considered.

A prepared approach can be make or break

1. Plan ahead. Think well ahead of time when structuring your business and ensure that there is a level of management below the founding team
2. Start with a letter. Initiate discussions with each member of the management team via letter, as opposed to discussing verbally. This ensures the details can be communicated clearly with less room for errors. (contact us for an employment law-approved letter template)
3. Suggest it as a medium-term plan something for the future - don’t present this as urgent.
4. Be realistic on the deal structure. Be prepared for the deal to be deferred and/or based on earnouts.
5. Recognise that management teams are likely to be nervous about the prospect and the risk, even if they are excited about the opportunity
6. Allow time for reflection. Be aware that the ‘management team’ may take a while to be formed, 

With a clear plan, an MBO can offer a reassuring route to exit. 

If you're thinking about possible routes to exit your business and would like a confidential discussion, please contact Matt Chandler at [email protected] or Neil Hutchings at [email protected]