In the past 6 months or so we have been noticing an increasing number of business owners who are looking to exit their Company by way of a Management Buy Out (MBO). MBO’s come in all shapes and sizes and have various weird and wonderful acronyms attached such as MBI (Management Buy In) or VIMBO (Vendor Initiated Buy Out), but in this article we will look at why MBO’s are becoming more and more popular.
What is an MBO?
Broadly speaking it is where one or more managers of a business purchase the shares of the company they work in from the existing owners. Usually this will involve a new holding company being incorporated to purchase the shares in the trading company, as this will allow the trading company to repay any borrowings required to fund the purchase.
MBO’s can be funded in many different ways, whether this is from the Manager’s back pockets, with Bank or Venture Capital Finance, with deferred consideration or with a combination of these.
Why are they so popular?
MBO’s allow owners a route to exit their business, realise the value they have built up over the years and provide the ability to leave the business in the hands of people who know it well and can lead it into the future. They are usually simpler than a full-blown sale to a third party.
A full or partial MBO will allow the owners to realise all or some of the value in the company
There are many reasons why MBOs are becoming more popular, these include Business Owners deciding to step back from their business following a difficult trading period caused by the Covid 19 Pandemic, it might be a suitable time for them to retire or they simply do not want the stress associated with a sale to a third party. An MBO also provides an exit route when a sale to a third party is not feasible.
As both the Buyer and Seller know each other there is usually more comfort with deferred payments over a longer period as this trading company can essentially fund the MBO or at least part of it. The warranties (essentially promises about the company and its business) in the share purchase agreement are usually simpler as the management team have been involved in the business so should have a good knowledge of it and will naturally require less warranty cover.
An MBO can also give some comfort to the exiting owner that the business they have built up over a number of years will continue in line with their vision and won’t be absorbed into a large entity or ripped apart to fit the Buyer’s corporate structure and ethos.
It is sometimes the case that an MBO will result in a lower return for the business owner, but this must be offset against the lower costs and the avoidance of the stress associated with an external sale.
The rise in popularity has many facets, from being attractive as a potentially simpler method of sale of a business to allowing the business to continue to be run as an independent entity and even allowing the company to self-fund part or all of the MBO. The Corporate and Commercial team at BHW Solicitors have worked extensively with business owners and management teams on MBOs, if you would like to discuss with them please contact them at firstname.lastname@example.org .