If you are thinking about selling a subsidiary or non-core asset, it may be worth considering whether a sale to the existing management team might be an option.
Management buyouts can work well in almost all types of business, provided you have the right team in place. However, as seller, you will need to be patient and think creatively to get the key people on board and the deal completed.
Advantages of selling to the existing management
As a starting point, an established management team will be familiar with how the business works. They will have a good understanding of the day-to-day operation and in many cases are effectively running the business with Head office and financial support. They will already know what has contributed to its success, its weaknesses, and opportunities for growth.
As the existing incumbents, they will know the business well, enabling them to ‘hit the deck running’ once the deal has completed and provide any essential continuity to customers, suppliers and other colleagues who may be concerned about the business future.
Do not be surprised if you experience new energy and commitment from the team. The prospect of acquiring the business that currently employs them creates a new dynamic and will provide an added incentive for the management team to work hard, making decisions in the longer-term interests of the business.
Unlike a sale to a third-party acquirer that will require significant due diligence, a full business handover and most likely your commitment to help integration with their existing systems and processes. The MBO team will simply continue with the processes they know, requiring far less hand-holding post completion with any business deintegration process during the weeks and months that follow.
A sale to the existing management team will negate the need to go out to market and find a buyer, helping maintain the highest level of commercial confidentiality throughout the process. Divesting to management can often provide more flexibility in determining the timeframes and process on exiting the business asset.
Planning ahead
It may be that your current management team does not have some of the skills required to run the business, or even the desire to do so. However, it should be possible to address this if you start planning far enough ahead.
Will I get the best value deal?
Before deciding on a MBO over a Trade Sale, it may be worth talking to an experienced business sale / divestment advisor regarding options. The sensible option may be to run a simple confidential market test to gauge the level of potential interest from trade buyers before fully exploring the MBO option. Agreeing the sale of your business through a management buyout, as opposed to competitive market bids, will need to be manage correctly and will raise concerns and possible shareholder questions about whether the price and terms agreed represent a good return on investment.
While it is the case that some management buyouts are agreed for less than what is perceived to be the going market rate, this ignores the fact that the purchase price may have been discounted to take account the certainty of sale, uncertain trading conditions or to contain any additional commercial risks of selling to a competitor.
Financing the deal
Depending on their backgrounds, it may take the management team some time to raise the finance they need to fund all or part of the purchase price.
Depending on whether you want any continuing involvement, it is also possible to be creative in how a deal might be structured, including payment over a period of time. One option is for the deal to be part financed through deferred payments or an earn-out. This is where the seller receives payment in a number of instalments post-completion, often linked to the future trading performance of the business.
As seller, you will likely require some protection in the form of controls as to how the business will be run. If not properly detailed in the sale documentation, this could unduly impede the day-to-day management and running of the business by the new owners and become counterproductive.
Shareholders Agreement
Not to be overlooked in the eagerness to conclude the deal is the shareholders’ agreement. A mutual understanding and legally binding agreement between the various members of the management team. A carefully constructed shareholders agreement is crucial to the ongoing relationship between the new managers as the journey post-completion is likely to present a few twists and turns.
How long will an MBO deal take?
The deal process generally takes longer than both buyer and seller expect, as a guide, expect the average process to take around six months or more to complete. Both the seller and the MBO team can be distracted from the day to day running of the business by the deal process which can often become all-consuming.
Embarking on an MBO can be a complex process, even for seasoned business owners. Good planning, patience and structuring a sale in this way that is win / win for all parties is the only reliable way to a successful transaction. Helping to motivate the existing management team to share in the success of a business, whilst maintaining business certainty for both staff and customers alike.
For the seller it provides an opportunity to achieve a successful and controlled exit. Divesting a non-core business asset that releases time and resources to reinvest back into core business and future growth.
Choosing the right advisers will help ensure all commercial options are fully explored, providing deal transparency for other shareholders.
Discuss your options in confidence with Divestable.com
Discuss your options in confidence with Divestable.com
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