A common way for an SME business owner to consider disposing of their business is by offering it for sale to the existing management team – often referred to as a ‘Management Buy Out’, or MBO. MBOs can be complicated transactions, which place the business owner and management team on rival sides, and potentially use multiple sources of finance. However, they can have a number of advantages over a trade sale, such as;
- A smooth transition of ownership;
- Reduction in risk of failure because the management team know the business;
- Reassurance to employees, existing clients and trading partners.
The characteristics of a business that would be a good MBO target can include:
- A company with a good track record of profitability, and good future prospects without high risk factors;
- A strong management team with a good mix of skills;
- A supportive vendor;
- Future cash flows that can support a deal structure.
Typically, an MBO will require multiple sources of finance, including:
- Asset finance – Funding that enables businesses to borrow against the assets in the company, usually property, stocks or debtors;
- High street and private debt – Banks will often consider providing a cash-flow term loan, repayable over 3-5 years to support an MBO;
- Private Equity (PE) – PE funds will focus on backing good management teams;
- Vendor loan notes – Often, the sellers will have to help fund the transition and leave some of their consideration in the company as loan notes to be repaid over time;
- Share capital – lenders will require the management team to invest meaningful amounts of money into the business in the context of their personal wealth in order to ensure that the management team are fully motivated to deliver against their business plan.
Any funders will pay close attention to the skills, experience, knowledge and credibility of the management team as well as their vision for taking the company forward. For their part the management team will have to make the transition from being employees to owners. This requires a change in mindset from managerial to entrepreneurial, and all parties need to ensure this is a transition that is achievable.
The MBO process can take several months, so the vendors and management team must be prepared to fully commit to the transaction for that time frame. This can be challenging because the company must be run as normal and keep on track while the transaction is ongoing.
What it means for the business
An experienced finance director will be an integral part of a senior management team considering an MBO. They will add credibility to the team and to the business plan that will be fundamental to securing the necessary external funding required in order to make the deal happen.
Artemis Clarke helps business owners find finance directors that have the experience to support them. Not just to help them survive, but to help them thrive – whatever their business goals.
Speak to us about how the right financial help could make a difference to your business. Call 0117 244 1891 today.