If you are about to embark on an MBO or are in the early stages of considering whether this is the best route for your business, then your management buy-out team needs to ask itself some honest and fundamental questions; the answers to which could make all the difference to not just completing a smooth transaction, but to achieving future success for the business under its new management.
Every management buy-out is unique in terms of the opportunities and challenges facing the buy-out team, but most successful transactions tend to share some common traits
Can you run the business better than its current owners?
It is easy for the buy-out team, fuelled by enthusiasm and a bright vision for the future, to underestimate the contribution made by the current owners, especially if you have different views on the future of the business.
Make sure you take time to prepare a robust and well-thought out business plan and consider carefully how the business will grow following the buy-out. This process will help to address any gaps left in the management team following the exit of the current owners and allow you to rectify these to make sure you have the team you need in place.
Is the team credible in front of the funding providers?
When funders are reviewing proposals, they will consider a number of things, particularly the track record and quality of the management team.
Enhance your credibility with a comprehensive business plan and a robust (and realistic) set of financial projections which are driven by the buy-out team. Work with your accountant to make sure the information the team presents demonstrates a viable investment opportunity that funding providers will have the confidence to back.
Will key customers, supplier and staff support the team?
It is important to test the water with these stakeholders and understand both who within the organisation hold the key commercial relationships and whether you can count on their support. Without it, the buy-put team, may not have a viable business.
Is the team resilient enough to deal with the negotiations and due diligence process?
The process can become emotional and protracted, making huge demands on time and energy. You will all still need to balance the demands of continuing to run the business with being able to pull together a successful bid and negotiate with your current employer. This is often easier said than done and is likely to require external help to ensure that you are able to provide all the information needed in the process and still continue to focus on the underlying business.
Is each of the team prepared to back their belief with financial commitment?
A high number of the buy-outs that our Corporate Finance team is currently advising on are funded through a combination of sources; it’s good news that there are active funding providers in the market to finance these transactions, however these packages can sometimes leave a shortfall.
Make sure each member of the new management team understands their short and long term financial obligations; the funding providers may well expect the buy-out team to make a contribution which reflects the equity risk – and ultimately, opportunity for reward (the fundamental difference between being an employee and becoming an owner of the business!). Make sure early on in the process that you are all willing (and able) to find the personal funds to finance the transaction.
Does the team have a trusted advisor to provide advice and guidance?
Advisors will take many forms, but both the buy-out team and the current owners will need guidance and experience to arrive at a well-structured transaction that is capable of being funded, whilst at the same time taking into account the various personal and corporate tax issues associated with this type of transaction.View all insights