In a management buyout (MBO), the business is transferred to one or more employees within the business. This often involves the second-in-command, a manager in charge of a division of the company or the current management team (the second echelon).
When there are multiple shareholders within a business, one of the other shareholders may be the buyer. Sometimes of necessity, because of a conflict situation between shareholders. Often there are all kinds of provisions in the shareholder agreement about how to act during this type of situation.
In this article on management buyout, you'll find:
- Family succession
- Advantages and disadvantages of a management buy-out
- 10 steps to a management buy-out
For a long time, an MBO seemed to be reserved only for large businesses. It involved divesting a loss-making division or a division that was no longer part of the core activities and selling it to the incumbent management, but nowadays a management buyout is increasingly a viable option for SMEs as well.
Family succession
A special form of a management buyout is the transfer of the business within the family. The son, daughter, nephew, niece or other family member is often already working within the business or gaining experience at another business to return later as successor. Although it used to be natural for (one of the) children to take over the family business, nowadays there is less and less interest in family succession. The new generation of entrepreneurs would rather start their own businesses than follow in the footsteps of the "old gentleman.
Business transfer within the family is probably the most complex form of a business sale. Because business and personal relationships are intertwined and the entire family is effectively involved, it is often an emotional minefield. In the end, it's all about getting a transaction that is right for the entire family, one that the transferor, the transferee(s) and the remaining family members feel good about now and in the future. If the business transfer is stranded for any reason, it can lead to irreparable damage within the family.
Advantages and disadvantages of a management buy-out
Here are the pros and cons of a management.
Wernemer
+ Relationship between buyer and seller
+ Employee knows business, customers and suppliers
+ often faster business transfer
- Good employee not always good entrepreneur
- Limited financial (own) resources
- Dissatisfied employee after failed transfer
Family member
+ Continuity of business guaranteed
+ Relationship between buyer and seller
+ Preparing for succession can start early
- No objective assessment of successor qualities
- Usually lower selling price
- Family unrest after failed transfer
10 steps to a management buy-out
When you want to realize a management buyout, these are roughly the 10 steps you need to take:
1] Establish with the owner the objectives of the acquisition. Work out the route from the current situation toward the desired goals so that a rough plan exists;
2] Record all agreements made to avoid misunderstandings;
3] Put together a business plan, which outlines the goals, plans and agreements;
4] Get a valuation done. When you know what the business is worth, you can move on to step 5;
5] Inventory equity and financing options so negotiations can begin;
6] Perform a feasibility scan. How is the business doing and what does this mean for you?
7] Time for negotiations. The acquisition seems realistic and a plan is ready, so time to make a deal with the seller;
8] Now that the deal is complete, the letter of intent can be signed. Both parties have agreed to the acquisition and the financing has also been arranged;
9] Before signing the final agreement, there is one more essential investigation to be done, namely due diligence. It is only at the end of the checklist, when in fact this investigation runs parallel to previous steps. The results of the investigation must be clear before the agreement is signed;
10] Signing the purchase agreement; the final step towards the management buyout.
Remember that a management buyout is a complex matter, especially because of the relational aspect. Buyer and seller have often been business associates, or even family members, for years, so a business acquisition can be quite exciting. Therefore, engage a timely adviser who can separate emotional aspects from the business aspects.
