Will An MBO Secure The Family Business Future?

Are management buy-outs a means of ensuring viable futures for established family businesses? Selling or handing over the family business will be one of the most difficult decisions a family will make and many different alternatives will have been explored. Neil Orford explains more.

More often than not, management and employees hold the key. Their loyalty, commitment and knowledge of the core values of the business mean that they can become the natural choice as successors.

The climate has never been better for the management team to take up the once in a lifetime opportunity of acquiring ownership of the business from its shareholders – the cost of finance is relatively low, venture capitalists have money burning holes in their pockets and company values remain at sensible levels.

A Management Buy-Out (‘MBO’) works well for the vendors too. Vendors can test the feasibility of the buy-out before presenting the opportunity to management and they can sleep comfortably in the knowledge that their business will not be subjected to the commercially sensitive scrutiny of a trade buyer.

There are a number of advantages and disadvantages associated with MBO’s and careful consideration needs to be given to these prior to proceeding down the route of one.

Advantages of an MBO

• Management work in the business and therefore have an understanding of the operation and can make the MBO process easier

• Significantly reduced due diligence requirements

• Potentially reduced warranties and indemnities, reducing comeback against the vendor

• Some businesses/market sectors do not lend themselves to trade sales and therefore an MBO can be a way of exiting successfully.

Disadvantages of an MBO

• Failure to complete an MBO can ultimately make the management’s position untenable

• Consideration received for a business by a vendor is typically discounted compared to what can be obtained when selling the company on the open market

• MBO’s often include some form of deferred consideration, which may not meet the immediate cash expectations of the vendor.

• The first concern of many managers who are given the opportunity to participate in a buy-out is ‘how much will I need to invest personally?’ In most buy-outs, the bulk of the finance required to fund the acquisition is provided by banks, asset funders, venture capitalists or the vendors.

An investment from the management team is helpful in securing the funds required, not because of the size of the investment, but more importantly for external funders it demonstrates the commitment of the management team to the buyout.

The buy-out process can be complex and the management team will have to accept that the financial gearing in the business, due to the external investment, will be higher and any funders will keep a close eye on progress.

But if the management team are confident in their ability to deliver the plan and grow the business then their financial reward can be significant.