Why more people are buying in to buy-outs

Management buy outs are a realistic alternative to trade sales for many vendors, however there are some pitfalls to be aware of before commencing discussions. So what are the key issues to address?

Management buy-outs or MBOs have always been a good alternative to a trade sale for shareholders in small and medium-sized enterprises, although I have seen an increasing number of vendors considering this route in the past twelve months.  This has partly been driven by a number of uncertainties in the market such as Brexit and the lower oil price environment which can cause some trade buyers to delay their acquisition strategies.

MBOs can, of course, be initiated by either a vendor or a management team.  Either way, it’s vitally important to contact a corporate finance adviser at the earliest possible stage, as the consequences of a deal falling through are often challenging. Management teams can potentially be disillusioned and the vendor is left in a weakened position.

The key support you need is in the areas of valuation, structuring of the transaction and funding.

It’s all too easy for managers – or even vendors – to be under a misapprehension about the value of the business venture and availability of external funding, so detached independent advice becomes essential.

There are then a range of options for structuring and funding. For relatively smaller transactions, the vendor may have to assume the position of funder for some or all of the consideration, receiving agreed payments from the future cash flow of the business, unless the business is fortunate enough to hold a large cash reserve. Debt funding, involving bank loans and invoice financing, may be available, depending on the appetite of the banks and the debt-raising capacity of the business. In reality, smaller SME MBOs would be a combination of both vendor and bank funding.  Involvement of corporate finance specialists will assist in identifying a realistic and deliverable structure early in the process by preparing a comprehensive financial model.

When we’re talking about more sizeable SMEs, private equity funding becomes more likely alongside bank debt, so having someone with experience of negotiating in this arena is certainly required. Due diligence can be a challenging process and there is also all the legal documentation to consider where specialist legal advice should be sought to  ensure a commercial approach is applied in achieving the desired outcome for all parties.

If everything is well managed, you might hope to complete a deal within three to six months depending on the complexity of the transaction and on having an experienced advisor, acting as a project lead and seeing the process through to successful completion.

An MBO can be a realistic alternative to other exit routes such as a trade sale, however there are many pitfalls to navigate.  Ensure that you have an advisor with a proven track record in navigating these pitfalls to reach the destination successfully.