What Should You Consider if Choosing an MBO?

If you’re running a company that you don’t own, or you own a company that you’d like to cash in on, then the idea of a management buyout, or MBO, might hold considerable appeal. They’re a means of selling a business to a familiar face, and a popular one, too. Let’s take a look at some of the reasons you might choose an MBO – and a few of the downsides that you’ll also want to consider.

Advantages

Close connection

For owners who already feel a strong emotional bond with their upper management, and who are keen to preserve a sense of continuity and of legacy, an MBO is sure to appeal. You will have a much closer understanding of your management than you would have of an outside buyer, and so you can be reasonably sure that the culture you’ve tried to instil will continue into the future – even if your management have their own ideas about how to successfully run a business.

Minimise Disruption

The staff will already be familiar with the people in charge, and thus there will be no sense of uncertainty and dread – or, at the very least, these feelings will be minimised.

Simple

MBOs tend to be much less complex than some of the alternative exit strategies. They can also usually be wrapped up relatively quickly. A protracted process can often be disruptive, not only to staff, but to suppliers and customers. This can have a deleterious effect on the value of the business. The simplicity of an MBO, by and large, helps to avoid this.

Drawbacks

Price

When you’re restricted to a single set of buyers, then there’s limited competition pushing down the price of the asset. You might therefore expect a smaller payday than you’d get from the open market. In many cases, however, the disparity is less than you’d think – since there are costs inherent in selling to a trade buyer. If management lacks the cash flow to finalise a buyout, then they might consider seeking a secured business loan for the purpose.

Insider Trading

If you know that you’re selling to buyers who have some control of the business’s performance, and therefore its value, then you run the risk that they might deliberately crash that value before the sale concludes, only to recover it afterwards. This sort of thing is highly illegal, but the only way to get around this is to keep a careful watch on the management.

Lack of Experience

In many cases, the management might not have much experience, if any, in actually running a business. There’s only really one way around this, and that’s through throwing them in the deep end to see if they can handle the pressures that come with ownership. If you’re concerned about the long-term welfare of your legacy, however, then you might want to have some conversations to prepare them.