Management buy out’s

Could you make a real impact on the business?

Over the past few years there has been an increase in the number of Management Buy Out’s (MBO) that have taken place. This is when a group of managers agree to purchase the business they work in from their existing owners. Members of the team seeking to complete the MBO invest some of their own personal money in return for a percentage of the equity in the business.

The existing owners sell all or most of their stakes in the business to the new managers and their fellow investors. MBO deals can range in size and complexity, from the relatively simple to the highly complicated, and there is typically the necessity to raise finance external to the business.

Managers that launch a MBO are usually motivated by the fact that they can make a real impact on the business, and this provides them with the opportunity decide of the future strategy and direction of the business in the future.

The financiers, as a general rule, will expect that the amount of personal money invested by the team be deemed as 'meaningful', and this is usually expected to represent a considerable commitment by the new management team, although it does not necessarily follow that the amount required has to be a substantial sum.

One common scenario of when a business may be subject to a MBO is if the existing directors of a family-run do not have any children interested or capable in running the business. So in these circumstances, they may be keen to ensure the business and its workforce continues to work successfully.

MBOs can also follow acquisitions, when a company purchases another business and then finds that not all of what it has acquired is needed. In this situation it may offer the managers of that particular operation the opportunity to buy the business from them.

The reason many managers decide to mount a MBO is because the existing owners see the particular part of the business they work in as no longer core to the whole operation. They could be planning to sell it or even close it. Some companies that are in financial difficulties decide that they also want to sell off assets and get some cash in to stave off financial ruin.

For successful MBO there needs to be a combination of elements in place to ensure its success and the team of managers should ideally have a broad mix of complementary skill sets. One member of the team should also have a sound knowledge of the financial workings of a business and importantly someone needs to have a clear vision of what the business can achieve, given time and investment.

The business does not necessarily have to be profitable but it does have to be capable of achieving profit and be viable. The existing owner of the business must also be willing to sell. If they have no intention of selling, there's no way of taking it over unless the financial backers and shareholders in the business give their approval.

An MBO at the end of the whole process has to achieve a realistic price for the business. If the existing owners are selling because they want to retire, they'll hold out for the best possible price. So too will most owners, except those who are desperate to get some cash in. The agreed valuation has to reflect the potential of the business.

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