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Why the future owner of your business could be staring you in the face

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Many business owners automatically assume that another company will buy their firm, but for some businesses, the ideal acquirer may be your existing management. Today, there are around 9000 management buyouts (MBO) worldwide every year – one in 10 of all acquisitions – as better access to funding and more creative deal structures provide ‘win-win’ situations for all involved.

It’s important to keep an open mind, as your management team may be the best and most trusted buyer. After all, they already know your business, your staff, and your customers. However, there are more factors to consider for an MBO, as outlined below.

Viability – to get anyone to invest in a business, it goes without saying that the venture must be in reasonably good shape. You don’t need to be posting 20% annual revenue growth, or be a market leader, but the future prospects for the business should be reasonably strong.

Leadership – are the essential roles covered by the MBO team? Typically comprising a managing director, finance director, sales director and operations director, the team needs to demonstrate its skills and experience. If the team needs expanding, the banks and private equity funds can bring in external directors. Finally, the MBO team must be unified around future direction, as any faultlines in the team will soon emerge to compromise the project. 

Growth prospects – while the MBO team may be happy to spend 10 or 20 years with the business, private equity investors are typically looking for a profitable exit after 3-5 years. Profitable growth is therefore essential to most investors. Furthermore, there is less margin for error for an MBO team, as the business typically takes on debt as part of the funding.

Commitment – there are dozens of ways to fund an MBO, but they all start with 100% commitment from the management team. That might mean each director is required to invest in the future prosperity of the business the equivalent of a year’s salary. So commitment from everyone is critical.  

Expectations – while vendors don’t want to sell themselves short, management teams typically can’t pay top dollar compared to trade acquirers. However, the deal can be structured to satisfy both sides.

Above all, vendor and MBO team are so familiar with each other, both parties benefit from hiring external advisors to skilfully negotiate the details of each of these points, and secure a deal that works for everyone.

Posted Jan 2017
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