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An MBO is often triggered when the existing owners decide to retire. A well run business with processes and procedures that isn’t reliant on the owners are attractive to lenders. There tends to be less risk ‘passing the batten’ onto the existing management team and skills gaps can be plugged with lateral hires, if required.
An MBO can also arise when an organisation looks to exit a non core subsidiary or division, because it provides a swift solution with less distraction for the stakeholders and the transition to new owners can be seamless.
An MBO may be less time consuming, however it remains a complex financial transaction and care needs to be exercised. Experienced advisers know whether a transaction is well balanced, whether the funding structure is sensible and understand common pitfalls that can derail a transaction.
Compelling reasons for an MBO
Less time consuming;
Perceived less risk;
Confidentiality - sensitive information isn’t released to third parties;
Provides a smooth transition to new owners, and
Seamless to customers, suppliers and other key stakeholders.
Disadvantages of an MBO:
The team has to inject personal cash to underline their commitment;
Management may devote excessive time to the MBO to the detriment of the business;
Tax legislation needs to be addressed early to avoid ‘bear traps’, and
Vendor invariably funds part of the consideration.
Funding an MBO:
Debt finance
Asset finance
Personal funds
Private equity
Vendor deferred, including rolled up equity
The global pandemic has undoubtedly reduced the number of MBO opportunities as owners and key personnel assess the impact of Covid 19 on their businesses. For some, the last 18 months have been dire whilst others have returned phenomenal results, the key for advisers is to assess whether the change of circumstances is permanent or not.
A successful MBO brings rewards for all parties involved. If you would like to know more, feel free to get in contact.
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