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
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!