When you have worked hard to build up a successful business it is natural to feel uncertain about selling it. But what if you could pass it on to a team of trusted and reliable individuals who are already involved in the business?
Management buyouts (MBOs), where the existing managers acquire all or a large part of the company, are often over-looked by owners but can offer several advantages for both the seller and the company itself.
A common concern for many exiting owners is how the company will change under new ownership. Selling to a management team who know and understand the business is more likely to preserve the company culture and has the added advantage of bringing consistency to employees, clients and suppliers. Owners are able to fulfil their natural instinct to pass on the business they have nurtured to worthy successors.
Keeping trade secrets safe
A major advantage MBOs have over trade sales is increased confidentiality. Dealing with external buyers can alert the outside world to the fact the business is up for sale. With an MBO there is no need to provide confidential information to competitors who might use it to enhance their competitive position.
Familiarity with business
Selling to existing managers can be quicker than selling to a trade buyer. They already know the ins and outs of the business which can shorten the negotiation to agree the terms of the sale. It can also mean there are fewer “surprises” in the due diligence stage of the process.
Both the funders who have supported the transaction and the new management team will be keen to increase the value of the business once they have taken over ownership. Accordingly, if the seller part funds the MBO by retaining a minority stake in the business, then they receive “two bites of the cherry” as they see the value of their “rolled-over” holding grow as the business grows and increases in value.
Realistic price setting
Many sellers will automatically look for a trade buyer because of the long-held view that they will pay a premium price. However, this is only true if the business is in a sector where there is lots of acquisition activity and these high initial offers can often be “chipped away” following the due diligence process and end up looking less attractive. Whilst the price offered by the management team is likely to be more realistic, it should more closely reflect the true valuation of the business and will therefore avoid protracted price negotiations.