Management Buyout

The Pros and Cons

What is a Management Buyout?

A management buyout (MBO) is a transaction where the core management team of a company work together to buy a company, or part of it.

Advantages of an MBO

There should be a limited due diligence exercise as the management team already know the business

The sale process can often be quicker and easier than a third party sale

May be easier to agree a price for the business as the seller knows who they are negotiating with and the managers know the business

There is decreased risk of confidential or sensitive information passing to a third party

Warranties and indemnities given by the seller in the sale agreement are likely to be limited compared to a third party sale

Good option for sellers who have no succession plans or for businesses that are too small to attract a trade buyer

There is likely to be less disruption to the company as the business will effectively continue as usual with the same management team

There is generally better performance and commitment from members of an MBO team acquiring the business

Disadvantages of an MBO

Seller may get a lower valuation for the business than could be achieved through a trade sale

It is likely that the management team may struggle to raise sufficient finance between them

The management team will need to raise external finance through bank, equity investment or other means and often a combination of these

External funding will put financial pressure on the business

An equity team will want some control over what can/cannot be done without their consent and the team needs to be aware of handing over too much control to an investor

The team needs a good mix of experience at management level for the team to operate well as business owners

The team needs to be able to work together and agree how decisions will be reached, if there will be a leader (Managing Director) and what happens if someone wants to leave, etc.  Many of these issues should be dealt with in a shareholders’ agreement

There is potential for conflicts of interest if the managers become too concerned with their own investment and their role as shareholder rather than their role as employee and what is un the best interests of the company

If you have any questions on any of the above, please get in touch with a member of the Corporate team by emailing corporate@mlplaw.co.uk or calling 0161 926 9969.