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What is a management buyout?
A management buyout is when a company’s management staff buys the business and takes over company operations and the ownership of all assets.
Sharon McDougall of Scotland Debt Solutions explains more.
Business ownership may pass into different hands as company values shift, directors implement structural changes or various stakeholders transition in and out of business.
During the life cycle of a business, a time may come when the company employees pursue ownership of the business through a management buyout (MBO).
What happens during a management buyout?
A management buyout is when management staff join forces to buy the business they work for and take over its assets.
There are several common reasons for management buyouts.
Employees often pursue this route to simplify the company’s operating structure, take the business into their own hands and make it more sustainable.
However, they will need to consider how to approach shareholders, how to negotiate a sale price with shareholders, how to fund it and the structure of the management buyout.
Price negotiations will determine whether the management team wishes to buy part or the whole of the business.
What are the critical stages of a management buyout?
There are five fundamental aspects and stages of a management buyout.
1: Approach shareholders – A management buyout may present a lifeline to the business if the current owners wish to exit. The transition will likely be straightforward and the handover discreet, without risking confidentiality, as the incoming team will already be familiar with the business.
2: Negotiate sale price – As with any business sale, the sale price must reflect the actual market value of the business.
Price negotiations will determine whether the management team wishes to buy part or the whole of the business.
A business valuation calculates the worth of a business and can be used as a starting point to gauge an accurate sale price and goodwill value.
3: Arrange funding – The management team will require substantial funds to purchase the business, some of which may be required upfront. This may include a mix between private cash, external funding, buyout finance, and/or seller financing when the seller extends a loan to the buyer.
4: Ownership transfer – The management team will control the business once the transaction is complete. A handover may also be arranged to streamline the switch between owners.
To complete a successful takeover, the management team often requires true entrepreneurial spirit and access to funds.
Why might a management buyout take place?
A common reason behind a management buyout is that existing owners wish to leave the business or the management seeks a direct hand in the business’s success.
To complete a successful takeover, the management team will require true entrepreneurial spirit and access to funds.
A management buyout removes challenges often associated with a traditional business sale, the main hurdle being the search for a suitable buyer.
