Execute a Successful MBO

If you’re looking to cash in on your small business, then a management buyout might appeal to you. Successfully pulling one-off, however, requires a little bit of groundwork and planning. By taking the right steps ahead of time, you’ll be able to establish whether an MBO is a right call for your business – and you’ll be able to ensure that the transition goes off without a hitch.

What is an MBO?

A management buyout, or MBO, is when a company is sold to its upper management. This has a number of advantages.

It ensures that the people running the company have a strong understanding of its inner workings.  The management team have a strong financial incentive to perform well in their day-to-day work. The disruption associated with moving the company on to an outside buyer can also be avoided. You might also wish to sell to the management for sentimental reasons, especially if you have a close personal connection to the business and an interest in its future prosperity.

How do you finance an MBO?

You might assume that your management team don’t have the necessary funds available to buy out the company. But you actually have several options, here. These include funding from private equity and venture capital, or from a bank. Worthy of special consideration is a business cash advance, which will solve some of the liquidity problems without imposing a timeline.

Another option is an earn-out, which is where extra consideration is paid out depending on the performance of the business in the future. This deals with uncertainty from the perspective of the MBO team while maximising the value of the business.

What makes an MBO successful?

So, what separates a successful MBO from an unsuccessful one? A few factors stand out.

A strong cash flow will help to provide the liquidity necessary to get through that rocky transition period. It will also allow for any debts to be repaid quickly, and for investments to be made in the business.

The management team themselves should also ideally have experience with the responsibilities of ownership, as well as a strong, broad knowledge of the company. If you’re unsure of the management team’s qualities, then it might be a good idea to get to know them more closely and give them the opportunity to demonstrate their qualities. Some form of phased transition might be appropriate.

When cash flow is strong, the company’s debts can be more easily repaid, too. If the company has decent growth prospects, management will have an easier time financing the buyout in the first place. Certain industries are also in a stronger position when it comes to management buyouts. If you’re in a highly-competitive industry, then it might be that you’re not in the best position to deal with any turbulence that might result from the buyout.