8 Things to Consider When Going Through a Management Buyout

Planning your Management Buyout

For any small or medium-sized business, the prospect of facing a management buyout represents a period of excitement, anticipation, stress, and careful consideration. All parties involved – whether as the current business owner or as part of the management team looking to take over the company – should heed the advice of experienced business professionals who will be able to help focus on the intricacies of the process and any legal ramifications of the deal.

This guide to planning a successful management buyout will help you fully understand those considerations that are essential to a smooth transition of ownership. Take a look at our management buyout checklist below and speak to the team of experts at THP Chartered Accountants today for more information.

What is an MBO and is your business ready?

Before embarking on the management buyout procedure, it’s of the utmost importance that you give due thought to two of the most vital questions that need to be asked:

1. What is an MBO?

Put simply, a management buyout represents the sale of a business by its current owner to those individuals already within the business. Essentially, the management team already employed will combine their individual resources to acquire – and take full control and ownership of the company, building on their existing knowledge of its services, products, processes, and structure to help drive it to new levels of success.

Often, a management buyout represents a favourable option for business owners looking to sell and for those that wish to retain a stake in the business. After all, the knowledge held by the management team purchasing the business will prove invaluable to an effortless succession in responsibility. What’s more, the existing staff will feel more secure in the roles, without fear of an entire new team coming in to replace them.

2. Is your business ready?

For a management buyout to be successful, more often than not the most important factors to consider are the right time and the right place. Knowing whether your business is ready for a buyout can be difficult to ascertain, but there are some factors which should always be within your thinking:

• Does the company have a good record of profitability?
• Does the company have good future prospects?
• Does the company have a strong and committed management team?
• Does the company have an owner that is ready to sell?

If all the above considerations can be answered in the affirmative, the company will be in a good position to embark on the management buyout process.

The Management Buyout Process

Once the decision has been made to begin the process of instigating a management buyout, it can often take a number of months – if not years – before the full transition will be complete. However, in most cases, the stages of the buyout will follow a similar pattern:

3. Establishing a fair valuation

The current owner should always seek necessary tax advice to ensure that the transition of ownership meets their requirements. This process will also entail establishing a fair valuation for the business; this can be determined by both the owner and the potential buyer but should also be subject to an independent valuation by third-party experts.

4. Obtaining funding

Once the valuation has been decided, arguably the most important step is for the management team to find the funds for the purchase. Of course, it is unlikely that the buyers will have access to enough cash to buy the business outright, so assessing the benefits of debt only or debt and equity funding is key. It may, for example, prove most effective for the team to bring in a private equity investor to help complete the deal. This may involve having to relinquish a stake in overall holding, so careful consideration among all parties is essential.

Alternative sources of funding will also be available, such as asset finance or bank loans, so taking a thorough look into all viable options will ensure the management buyout team will be in a position to secure the best deal.

5. Conduct a thorough financial analysis

Such is the level of investment required to conduct a management buyout, it would be foolish to approach the process without conducting a complete financial analysis of the business before completion. Being able to construct an accurate forecast and financial model that demonstrates the serviceability of debt will be fundamental to securing the funding and implementing a successful business strategy. It will also highlight any concerns over potential growth opportunities, and raise awareness of areas of the business that may need to be developed.

6. Don’t ignore the risks

You should never feel pressured into completing the buyout should any concerns be highlighted during the early – or even late – stages of the buyout. In particular, you should assess the extent of potential risks and weigh up the best course of action. It may be that the seller is looking to pass on the responsibility of running the company because of fear over market competition. Alternatively, if the current owner maintains a dominant influence in all company activity, will the transition cause such disruption that others will leave or customers will go elsewhere?

By giving due consideration to the many risks inherent in taking over the business for another party, you should be able to assess whether the management buyout should proceed successfully or not.

7. Check your working capital reserves

It does without saying that growing a business once it’s been taken over is the key objective. You should never, therefore, neglect to focus on the working capital you have available once the purchase has gone through. All-too-often, failure to consider the costs of rebranding and reorganising the company can prove problematic. What’s more, lenders will often only offer to apply for funding just once, so making sure you have working capital reserves in mind is key.

8. Seek advice from professionals

The final and most obvious consideration for a management buyout is to seek expert advice. At THP Chartered Accountants, our experienced and professional team will be able to provide you with answers to any questions about the buyout process, as well as support you every step of the way to ensure you complete your takeover in the best way possible.

To find out more about how our friendly and experienced team can help you, contact one of our offices in Chelmsford, Sutton, Wanstead and Saffron Walden today.