A management buyout (sometimes referred to as a “management buy-in” or “employee buyout”) is when the existing management team in a business buys the business from its current owner, rather than selling to a third party buyer. This can be an attractive exit-strategy for many business owners, as the business will be left in the hands of the incumbent management team, and often results in a smoother exit process.
Management buyouts can be popular to transfer ownership in a family business setting, however they are not exclusively so and are popular in private businesses of various sizes.
A successful MBO can offer the current owner an exit from the the company whilst having as much assurance as they reasonably can that the business grows under the stewardship of the existing managers. Management buyouts are often popular with all the employees within the business as they will already be familiar with the current management team, and therefore the management buyout process can be easier to manage.
The fundamental steps in purchasing a business remain the same. However, there are some key differences with a management buyout:
It is sensible for the management team to take expert accounting advice on how best to structure the management buyout. In addition to considering whether to purchase the company’s shares (rather than just the company’s assets), the potential buyers should also consider whether to purchase the business individually, or whether they should incorporate a new company.
Many considerations around structure will be influenced as to whether the management buyout is to be funded by equity investment or private equity funds, traditional financial institutions, whether part of the consideration will be made up of loan notes, or whether it should be structured as a leveraged management buyout.
A leveraged buyout is much the same as management buyout (or buy in management buyout), the main characteristic being that a significant portion of the finance is raised by borrowed money or asset finance, rather than through private equity financing. For example, the management team will borrow funds and use the company’s assets as security in order to raise those funds.
When considering a management buy out, the following issues should be discussed at the outset:
If you need any advice on management buy-outs, please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
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