Management Buyout (MBO)
Overview of Management Buyout
An MBO is the purchase of a business by an existing management team working in the business, usually in co-operation with outside financiers from both an equity and debt perspective. Management buyouts vary in size and complexity and are typically for a 100% controlling interest in the business from the existing ownership. The quality of the management team is crucial in executing a successful MBO and getting the appropriate financiers on board to complete the transaction. Having a strong management team that knows the business inside and out and how the day-to-day operations are handled will be crucial to ensure the MBO can be completed in a timely and efficient manner.
Determining the Structure
The sale of a business by the existing shareholders can take various forms and occur for different reasons and motivations by the existing ownership. Under the circumstances of a sale, in a lot of cases the current management team in place can be the most logical route to take in selling the business. The current management team understands the business and what it takes to run the day-to-day operations, which lessens the learning curve needed for a new owner and can provide comfort to the existing owner(s) that the business is in good hands and will continue to be strong into the future. This makes an MBO a very viable option for existing shareholders looking to sell their business. It can simplify the process and time in finding the right buyer for the business. The main thing that will need to be addressed is how the existing management team will finance the purchase, as it can be a large financial hurdle for them to get over. In the case of an MBO the positive news is there are several options that can be utilized in financing the MBO where there is a strong business and existing management team in place. This can be done with a very small amount of personal investment from the existing management team in making the purchase happen, making an MBO a very attractive option for all parties involved.
Key Criteria
Certain criteria will need to be met in order to complete a successful MBO. There is a list of key principles that will need to be checked off for the transaction to be a successful one. These include:
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Strong and competent management team in place to take over
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The business must demonstrate the capability to be commercially viable as a standalone entity
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A willing vendor(s) to sell the business at a fair and economical price
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The MBO must be capable of supporting the appropriate funding structure and not hinder the business and its ability to operate in any fashion
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Vendor(s) must be willing to stay on for a certain period to assist with the transition of the management team becoming the new owner(s) of the company
Steps of an MBO
The buyout process will commence with several steps in order to assist in making the process as simple as possible. The following steps are taken in a typical MBO transaction:
1. Initial due diligence and internal review of the business to measure the feasibility of the MBO
2. Determine appropriate financial structure for the MBO and present an expression of interest to the vendor(s)
3. Compile a confidential information memorandum/business plan to outline the management’s strategy in completing the MBO and presenting it to potential financiers
4. Commence presentations to potential financiers depending on pre-determined optimal financing structure
5. Ongoing vendor negotiations to get optimal purchase terms and finalize a purchase agreement
6. Preparation of all legal documentation for the buy out
7. Close the transaction with the vendor(s)
8. Assist in the post buy out integration with the management team and vendor(s) to make the transition as smooth as possible
A management buyout it a significant and life changing event for both the management group and the vendor(s) involved in the transaction. It can be a very exciting time for everyone involved and though it can be exciting, proper steps and precautions are needed to be taken so everyone involved can walk away happy on how the transaction unfolded and the business can continue to operate optimally well into the future. Take the proper steps and get the best professional help to ensure your goals are met in completing a management buyout.
If you are an existing management team looking to acquire the business you are currently employed with, or an existing business owner wanting to sell to your current management team and have further questions about the process, please do not hesitate to contact us and we would be happy to assist you.
Contact Pinnacle Accounting and Finance
#12, 2333 18th Ave NE, Calgary, AB Canada
| Tel: 403-453-0532