Management Buyouts (MBOs) are an efficient exit mechanism for private company owners to retire (or partially retire) by handing over control of the company to the senior management team. In previous articles, I have discussed the fundamentals of MBOs and the importance of preparation to deliver a successful MBO. In the current article, I shall aim to tackle the most thorny issue in an MBO – the price of the MBO itself!
Simply put, the MBO price reflects what the owners (Sellers) are prepared to accept to sell their shareholding to the management team (Buyers). Getting the price right in an MBO can be tricky at times, due to what is referred to as the ‘expectation gap’. The Sellers usually want the highest price for their business, however, the Buyers will look to restrict the price as one could argue they have been responsible for creating some of that ‘value’ in the business as the management team. The Buyers and Sellers may also have differing views on future growth trajectory of the business. Whilst the Sellers may be very optimistic about the company’s prospects, the Buyers may face steep learning costs of owning and managing the business, employees, suppliers and customers.
Luckily, bridging the expectation gap is often easier in an MBO as compared to any other transaction. This is mainly down to the fact that the Buyers and Sellers have (in most cases) worked together for a number of years and therefore, generally have a good professional relationship. That said, it cannot be ignored that this is an Employer/Employee relationship and both sides need to be wary not to fall out. Using advisors in the middle to negotiate the tougher elements of price negotiations is often the best way to preserve this relationship.
A further important pricing point discussion is the price adjustments. In a majority of the cases, the Buyers and Sellers will agree to what is known as the ‘enterprise value’ of the company. This is the value of the business on a pre-financing basis i.e. it does not take account of how the business is financed. However, this is not the final price that is paid out to the Sellers for their shares – this value is termed as the ‘equity value’. Certain adjustments for debt, working capital and cash are required to arrive at the equity value, starting from the enterprise value. In our experience, in some cases these adjustments can be very significant and cannot be ignored.
In summary the pricing discussions are tricky and can sometimes be prolonged, but on the positive side, in most cases the Buyers and Sellers are able to reach an agreement on price amicably.