What to Know with Management Buy-Outs

A management buy-out (MBO) is a form of acquisition in which the current managers of a company acquire a huge portion of the company. This can either be from the private owners or the parent company. Bankers and investors are open to MBO’s since managers are highly familiar with the operations and they are capable of creating value.

MBO’s tend to appeal to private equity firms that have the ability to provide a capital and ensure that a capable management team is present. Such situations usually occur when the owner is planning to retire and has already established a management team. It may also occur when a large conglomerate looks to sell non-core assets or divisions.

This kind of transaction appeals to a lot of people because it limits the expense and time required to market the business to prospective third party acquirers. Then again, sellers should be very careful when they market their business and introduce an MBO. This can lead to major problems and issues in a controlled auction process since the management team becomes a competing bidder for the business. In such event, the management team is allowed to scuttle other offers from legitimate buyers.

How Can the Business Be Purchased by the Management Team?

The team can invest some of the funds necessary to purchase the business that they are managing. Each of the members of the team may invest about a year’s salary. Then, they can obtain the rest of the money from banks and other financial institutions.

Should You Immediately Approach the Owner?

If you are part of the management team, you have to plan your moves wisely. Before you approach the owner, make sure that the transaction is plausible. Otherwise, you would only waste your time and risk your professional relationship with the owner.

How Should You Approach the Owner?

When it comes to MBO negotiations, keep in mind that the outcome of the transaction largely depends on your relationship with the owner. There are owners who view such approach as an indication of disloyalty. In some cases, it may even be grounds for dismissal. This is especially true if the owner thinks that the management team is only trying to purchase the business on a shoestring.

In order to minimize your risks, you have to find the right timing. Identify any sensitivity that might be in play. Your goal should be to convince the owner that you are a credible option in case he decides to sell the business. You may want to seek professional advice before you make any approach. You may also want to use an independent party to initiate the negotiation process and secure the best possible relationship between you and the owner. In case the negotiation does not become successful, you should still be able to work with the owner.

An MBO can be your first venture as an entrepreneur. You need to have the courage to leave the comfort and security of a management position and face the new challenges associated with independent accountability and ownership. Acquiring a business through an MBO can serve as your shortcut to financial success. You have lower risks, a shorter return on investment (ROI) waiting period, and easier access to financing. Then again, pursuing an MBO can also be highly demanding.

Anyway, if you still want to pursue an MBO, see to it that you avoid these common mistakes:

· Confusing employment and ownership, and not assigning a leader.

A leader is crucial in every business. Even if you invested the same amount of money as everyone else, you still cannot expect everyone to have the same level of authority in running the business. You have to understand that you are an employee and a shareholder. After completing the MBO, you can now directly benefit from the business’ success as well as have the freedom to express your opinions. However, at the end of the day, you still have to follow your boss.

· Being greedy.

You can seek financial help from various entities, including banks, private equities, vendor financing, term lenders, and subordinated debt providers. Of all your choices, banks are the least expensive form of financing while private equities are the most expensive. Banks have very strict rules while private equities offer more flexibility. Many people think that banks are the better option because they are cheaper, but this is not true. You are actually better off going with a private equity and having a small yet stable slice of the company. If you become greedy and incur a huge bank debt, you may have a hard time growing the business.

· Not anticipating possible issues.

During an MBO, certain unexpected issues might arise. For instance, the landlord may refuse to let the seller off the hook regarding leases or your financial backers may suddenly change their terms after completing their due diligence. You may also incur unexpected costs, such as legal fees.