Management buy-outs & buy-ins

MBOs and MBIs can be complex and time-intensive transactions and management teams need to assemble a capable and resourceful team of experts around them in order to maintain control and momentum as the deal progresses.

A management buy-out (“MBO”) is the purchase of a business from its owner by the existing management team usually with the help of financial backers.  A management buy-in (“MBI”) is a similar transaction but led by a management team external to the existing business.

The bulk of the finance required to purchase the business will normally be provided by financial institutions, primarily in the form of debt finance from banks or other lenders and/or private equity investment.  

The financial characteristics of an MBO therefore present management with the opportunity to acquire the business they are running, financed largely by external financial institutions with repayment of that finance flowing from the profits generated by the business acquired and/or on ultimate sale.  Management teams can make a significant capital gain from a relatively modest personal investment.  At the same time, the current business owner can plan and structure their own exit in a controlled way to a buyer that they know and trust.

The opportunity for an MBO may arise for a number of reasons:

• The owner of a private company may wish to retire;
• Shareholders may be in dispute;
• A group may decide to sell a non-core subsidiary;
• A receiver/administrator may wish to sell a business as a going concern; or
• An institutional owner of a private company may wish to realise its investment.

Competing with trade buyers

It may sometimes be the case that a management team will be unable to compete with the strategic price that a trade buyer might pay for a business.  However, there are also a number of reasons why an MBO bid can be more attractive to the vendor, such as:

• The vendor avoids passing sensitive information to a potential competitor;
• The vendor can reward loyal management;
• Management have a better knowledge of the business;
• Management can often act more quickly;
• Warranty obligations of the vendor are likely to be less onerous; and
• MBOs are often more palatable for the workforce.

Key ingredients for a successful MBO

The strength of the management team is key – the importance of an experienced, committed and balanced team cannot be underestimated.  There are other key features however:

• Hunger and desire to control own destiny and back own judgement;
• A track record of delivering consistently strong profit growth;
• A commercially viable business;
• A demonstrable growth strategy;
• A strong competitive position preferably in a growing sector;
• A willing vendor with realistic price expectations;
• Ability to support the required funding structure – cash generation is paramount; and
• A suitable exit or sale opportunity at some point in the future.

Financial backers will need to be convinced that the management team has a well balanced range of skills and can manage the business independently.  Should there be a skills gap, it may be plugged by introducing an external candidate.

The WilliamsAli team has extensive experience of planning, structuring, financing and successfully delivering MBOs across a range of deal sizes and sectors.  We have worked with management teams, business owners and investors on buy-outs and have a deep understanding of the key factors and issues required for a successful process.

Please do not hesitate to contact us to discuss MBOs and MBIs and how WilliamsAli can help you to deliver your plan.