Is Now The Right Time For An Mbo?

Director, Leanne Thomas, looks at the current market conditions and if it would help or hinder an MBO (Management Buyout).

A management buyout (MBO) is a transaction where a company is acquired by some or all of its management team, usually through a new company which will have been set up for the purposes of the transaction. The size of a buyout can range considerably from SMEs right through to corporate giants.

MBOs are an attractive prospect to the seller as well as the buying management team as they offer an opportunity for a smooth continuation of the business, which is transferred to a team of individuals who are already familiar and knowledgeable about the inner workings of the company. Selling the company internally in this way also means that the seller is protected from having to divulge sensitive and confidential information about the company’s operations to a third party, making the transaction less risky than an arm’s length sale and also reducing the necessity for a lengthy and costly due diligence process.

The finance required for an MBO is often substantial and it may be the case that the management team won’t have enough personal capital available. For this reason, managers looking to undertake an MBO may turn to external funding to finance the transaction.

MBOs in the COVID-19 crisis

Unsurprisingly, the advent of the UK Government imposed lockdown brought with it a feeling of uncertainty about mergers, acquisitions and MBO deals, with people preferring to stick rather than twist. However, with the initial shock now over, minds are turning to the question of how to adapt and prosper in the ‘new norm’ we find ourselves in.

Many management teams across all industries will have identified methods and processes of surviving and thriving, whilst some business owners will have taken this time to reflect and will be keen to cash out in the future, some sooner than later. As per Nigel Greenaway on 22 April 2020 (https://www.insidermedia.com/news/wales/dealmaker-upbeat-on-ma-market): “The current crisis has created a business risk that most people have not planned for – and that scare will focus minds about the robustness of long-term strategic thinking versus short term ability to exit.”. An MBO presents a real and practical solution to those who don’t have a succession plan in place and saves the seller having to invest a significant amount of time, money and effort into marketing their business in the hope of finding the right buyer.

One would be forgiven for questioning the current ability to raise the necessary finance to fund an MBO but there is already evidence of the market bouncing back from the Covid-induced moratorium with investors showing themselves willing to invest in medium-term opportunities. Moreover, institutional lenders have perhaps never been prepared to offer as much help as they are currently offering with the appetite to lend standing strong in the face of the crisis.

With all of that in mind, this is an unprecedentedly good time to plan ahead and consider whether an MBO is viable for you as a management team, or as a business owner looking to sell. So, what makes a successful MBO?

1) A company with a good track record of profitability;
2) Good future prospects for the company without high risk factors;
3) A strong committed management team with a broad and diverse mixture of skills;
4) A seller who is willing to explore a sale to the management team and who will accept a realistic price;
5) A deal structure that can be funded and supported by the future cash flows of the company.

To speak to Leanne Thomas, or the corporate team at Greenaway Scott about management buyout or exit strategies for your business, please contact the corporate team on 029 2009 5500 or email [email protected]