Management Buyouts (or MBO’s) are a highly effective way to achieve a controlled sale of a business to a trusted management team. I have written a number of blogs and articles on the basics of MBOs over the years based upon our “real life” experiences advising dozens of sellers and MBO teams.
In this current article, I want to focus on some of the key elements that are critical for the success of any MBO. I also want to touch upon the ground that needs to be covered before a company is ready to undergo an MBO process. So, let’s make a start!
As with many things in business, people are the single most important element of an MBO. The management team of the company are the buyers, so it is essential that the management team is comprised of the right people to lead the company forwards post MBO. In many cases, the controlling shareholders begin the process of putting together a ‘dream team’ well in advance to lead the company in preparation for an MBO. Recruiting the right people for the job is always a challenge, so if there isn’t a strong management team already in place to lead the company post-departure of the controlling shareholders, it is advisable to start the process as early as possible (sometimes up to 5 years before the planned MBO will take place). It is also important to ensure the team is locked in for the long term if an MBO is going to work. We often work with companies well in advance of an MBO to ensure that MBO teams have a tax efficient equity incentive to stay for the long term.
Once the right people are in place and locked in, it is crucial that they are viewed by the company staff as the future leaders of the company. Whilst the company staff need not be informed well in advance of an MBO, it is important that the controlling shareholders gradually step back from the day to day running of the business and hand over the reins to the new management team. It is also crucial that during this time the management team is coached on all aspects of running the business and they gain the confidence of key suppliers and customers. The handover process of managing key supplier and customer relationships from the controlling shareholders to the management team should happen well in advance of the MBO. Once the management team wins the confidence of key stakeholders such as suppliers, customers and staff, the company is ready for an MBO.
In summary, timely preparation is key to the success of an MBO. Getting the right people in and carefully handing over responsibilities is a fantastic way to provide succession in a business.