How to exit your business via an MBO

It’s no secret that the past few years since the Covid pandemic have been tough for business, global pandemics are not something that pops up in every business plan. It caused a severe recession with an unprecedented drop in GDP during the first national lockdown of 2020, which was of course followed by subsequent lockdowns in 2020 and 2021.  

On top of this, we have now entered a cost-of-living crisis, causing consumers to buy less and spend more on energy costs and business owners to seriously rethink their spending habits. Businesses are finding it harder to attract and retain staff with wages failing to keep pace with the rising cost of living, leading to increased staff turnover as employees are seeking better-paid work. 

All the above factors are enough to make business owners think about where they see themselves and the business in the years to come. It may be that it’s time for them to pass the business over to the next generation, maybe entering into retirement or if it is a family-run business, letting the younger generation take the reins and push the business into its next phase of life.  

A management buyout may be something on the cards for your business this year and if you have been thinking about this next step, we’ve put together a short article on how to do just that. 

What is a management buyout and how does it work? 

A management buyout or MBO is a financial transaction where someone or a group of people from the current management team, purchases the business from the owner. They will acquire most of all shares from shareholders and anything else associated with the business.   

To pass on a business like this is desirable to both the current business owner and the management team because the acquiring party already has extensive knowledge of the business, there is no learning curve for them to undergo, resulting in a smoother transaction and quicker completion. 

Positive implications of entering a management buyout: 

  • An MBO is a favourable way to streamline operations and improve profitability 
  • Planning in advance for an MBO means that time can be given to ensure the management team due to take the business over, have all the required skills needed. 
  • The management team is already known and trusted by the current owner and has the required skill sets to enable the business owner to seamlessly extract themselves from the business 
  • Management is likely to have the educational and work experience from within the company to help guide the business to new heights. 
  • Through structured finance, there are many options for funding available to complete a management buyout. 

Important factors to consider before entering a management buyout. 

As mentioned above, it is advised to start planning an MBO far enough in advance of beginning the process. One of the first steps would be to assess your current management team – the management due to take on the business – and assess what skills are required to lead the business to its new destination. For any areas that are lacking, it is usually advisable to recruit within the business or externally, to ensure that the team is well-equipped. 

MBOs can be a financial burden and is often quite substantial, however, the full share purchase amount is not usually completed upfront, instead deals often feature a structure to avoid overstretching the business’s finances and most deals feature an up-front payment and deferred element also. 

It’s also important to research where the management team can secure capital before undergoing an MBO. This could be through debt from banks or alternative lenders, although banks tend to consider MBOs risky ventures and don’t offer funding easily. Private equity firms are usually receptive to financing a management buyout. Still, one thing to keep in mind is that these firms often expect to get a share of the company even though they’re loaning the money to management. Other types of financing could be through owner financing which is funded directly through the seller that is repaid, or mezzanine financing, which involves a combination of debt and equity. 

How speaking with a structured finance team can help with an MBO

Alternative funders are becoming the main funding source for the changing needs within the SME sector presently, with banks pulling back from funding, especially when faced with sizeable operations such as an MBO. Alternative funders can offer more flexible funding structures and a higher amount of funding at a competitive rate.  

Summary of exiting your business through an MBO

In summary of how to exit your business via an MBO, the following checklist should hopefully help with a successful management buyout: 

  • Consider the management team involved and the skill set they have. 
  • Plan far in advance before entering the MBO process to agree on terms of the deal, including the purchase price 
  • Research finance options. 
  • Speak to a structured finance solutions team, such as PMD 

Speak to our structured finance solutions team

At PMD, we believe that your business can grow without limits, that is why if you’re thinking of entering your business into a management buyout, we have a wealth of knowledge and a wide network of professional advisors, willing and happy to discuss your unique circumstances on a non-obligatory basis. 

We are a multifaceted business finance provider, and our structured finance solutions team has access to over 150 lenders, offering flexible, independent, and competitive funding lines to help navigate your business through its MBO. 

If you’re considering a management buyout and would like to speak to us about funding solutions tailored specifically to you and your business, get in touch today to see how PMD can help. 

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