The process can be gruelling, as the MBO team will need to juggle their job and home life while dealing with investors, lawyers, accountants, corporate finance advisers and, of course, the owners of the business.
No two MBOs are the same, but there are a few common ways they tend to come about. It may be decided that a business owned by a large corporate is no longer core. If there’s a strong management team, the corporate might decide to sell the business to them. Or existing shareholders, who have built up the business, may want to exit. In fact, they may have consciously built up a strong management team to effectively make themselves redundant and, as a result, made it easier to sell the business without them.
Alternatively, the management team might propose the buyout to the owner. This is often the result of managers seeing an opportunity to kick-start a business that they think isn’t being run at its full potential. Occasionally we come across situations where the owner is running it for cash, taking out dividends rather than investing in its growth. The management might be frustrated and think they could do a better job of scaling the business.
However, a buyout is quite a dangerous thing for the management to initiate. They have obligations and duties as employees and sometimes as directors. Raising the prospect to unprepared owners is a signal that they’re not focused on creating value for shareholders, but instead thinking about personal gain. A management team considering this should be diplomatic, ideally trying to make the current owner believe it’s their idea to hand over power to the management team as well as showing the value to the owner of the capital payout an MBO may deliver to them.
The business owner must also tread carefully. If you’ve planted the seed in the heads of management that they’re going to be the owners of the business, they will start planning what it will be like once you’re no longer around. If the process doesn’t work, it will feel like a demotion for the management team and they may be inclined to leave. Full commitment and a contingency plan will be needed in case it doesn’t work out as expected.
Lawyers often get involved early in the process, giving strategic advice on how best to approach it. But once the process begins, the management team will need to be given license to speak with potential investors. There will need to be a management release letter setting out exactly what they can do and what information can be shared.
Then lawyers will be involved in dealing with offer letters from investors, negotiating the heads of terms and the sale purchase agreement, as well as a suite of equity documents governing the relationship post-acquisition. It’s a complicated process – even when everyone is well organised and prepared it can take longer than expected.
Despite the challenges, an MBO is a phenomenal opportunity for the incoming team. It can also be immensely satisfying for an owner to see a business being passed on to a management team they have hand-picked and nurtured – as well as providing an opportunity for the owner to secure a valuable exit.