The benefits of an MBO – taking control of your destiny

6th January 2017 by David Scrivener

Management Buyouts, or MBO’s, are a very popular mechanism for shareholders to achieve a controlled exit from their business. It also provides a great opportunity to reward those employees who have helped grow the business to what it represents today and provide them with a “once in a lifetime” opportunity of taking control of their own destiny.

Typically in an MBO, the senior management of a company purchase the entire company shareholding from the existing owners. A successful MBO can deliver great benefits to the management team purchasing the business (usually called the ‘MBO team’) and the existing owners selling their shares (normally called the ‘Sellers’).

Putting together an MBO requires teamwork. The Sellers need to want to sell to the team (as selling to a competitor could, in theory, provide them with a higher price) and the team needs to be prepared to take a leap of faith into the world of business ownership.

A significant benefit of an MBO for the employees is the continuity in the business post-sale. As the new company owners are the incumbent senior management team, the company retains its identity and preserves its ethos. This post-sale continuity plays a very important role in staff retention and motivation. It also ticks a lot of boxes for those Sellers keen on keeping things “the same” when they leave.  

An MBO is a very cost efficient way for the senior management team to become company owners. The company bears most of the financial risks because its assets are usually used as security for the majority of the purchase price. In most cases, MBO teams’ put in a surprisingly small contribution themselves. Of course, if the plan works, and the MBO team successfully grows the business, the pay-offs for each individual of the MBO team can be substantial. 

An MBO is also great for Sellers too as it releases cash proceeds to them quickly. As the deal is based on mutual benefit, the purchase price reflects a fair value for the Sellers. Further, since the business is well known to the new owners (the MBO team), the warranties expected from the Sellers are less onerous. All of this greatly simplifies the legal aspects of the deal and saves the Sellers’ money on legal & professional fees. 

MBOs are tax efficient too. It is usually possible to structure a deal so that the Sellers benefit from an effective 10% tax rate. This can also include surplus assets such as property or cash reserves.

In summary, MBOs drive businesses forward by incentivising the management team; and give Sellers peace of mind by releasing cash and preserving their legacy in the business. There’s nothing better than a win-win situation!


Author

David Scrivener

David Scrivener

Partner
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