Management Buyouts

There are lots of advantages to a management buyout but it’s important to be aware of any risks associated with a management buyout, including:

• Taking on high levels of debt

• Distractions from the day-to-day running of the business during the transaction

• Loss of skills of the current owners

• Valuation risks

• Loss of key employees

As with any transaction, it’s important to carefully consider the risks and benefits and work with experienced professionals that can help to mitigate the risks and ensure a successful outcome.

There are several ways to finance a management buyout, including:

• Borrowing money from banks, lenders and private equity firms

• Raising funds from investors in exchange for ownership

• The seller of the business providing financing in the form of a loan or deferred payment terms or an earnout

The financing structure of an MBO will depend on multiple factors, including business size, the level of debt the management team is comfortable with, and the level of risk that lenders and investors are willing to take on. Working with experienced professionals, such as lawyers and financial advisors, can help you to determine the best financing structure.

Existing shareholders may sell their shares to the management team or a company controlled by the management team, particularly if they believe that the management team is capable of growing the business or are the most viable bidders for the business. The price paid for the shares will depend on a variety of factors including the needs of the current owners and the prospects of the business.

On completion of the sale, the existing shareholders will usually cease to be involved but sometimes will remain for an agreed period of time as consultants or employees to allow a smooth transition of the business or to protect any agreed earnout.

The management team need to be mindful that in some cases external buyers may be able to offer a higher price for the shares, and if maximising the exit payment is the priority for the existing shareholders then they may opt to sell to them instead.

The interests of shareholders and the management team may not always be aligned, particularly regarding priorities or objectives. It is important for all parties to work with their advisors to ensure that the terms are fair and reasonable for everyone involved.

A management buyout can offer employees stability and continuity, avoiding the disruption and uncertainty that new owners and new managers can often bring. This can help maintain or increase employees' job security and morale. The management team will have a direct interest in the success of the business, which incentivises them to invest in and grow the business, providing opportunities for employee development.

Financing the management buyout may require the management team to take on significant debt, which could lead to changes being made to the business to cover the costs of this. It is important to communicate openly and transparently with employees about such changes to help manage concerns, though it is usual to keep the fact of negotiations for a management buyout at a ‘need to know’ level until the deal is done so as to avoid rumour and speculation.