If a business owner is looking to sell his or her business but is concerned about the well-being of the company and its reputation post-closing, then a management buyout (MBO) may be a beneficial type of acquisition to consider. An MBO occurs when the upper-level management of a company buys the business out from its shareholders or private owners. Managers who make the decision to buy out their company do so for the potential to reap more from the company's profits than they would as an employee. A management buyout highly incentivizes the buyers to put full efforts into the company, so that they may directly benefit from the cash flow.
Benefits to the Seller
One of the reasons that many sellers like the idea of a management buyout is because the seller will not have to be concerned about vital staff members leaving after the sale and therefore reducing its value post-closing, since ownership will give them incentive to remain with the company for years to come. A management buyout also tends to be a shorter process because due diligence is cut short, as a result of management already having possession of most of the information meant to be revealed during this process.
Many management buyouts are funded through debt financing, which can be a tricky move, since it lades the company with a substantial amount of debt on top of any business debts that have already been accrued. Therefore bank financing is not always the best option.
Oftentimes, the management looking to purchase the company will look to a private equity fund in order to help fund the acquisition. A vast number of MBOs are financed this way, since private equity will typically fund the deal in exchange for a share of the business's stocks.
Seller financing is another source of funding often utilized in an MBO. This type of financing allows the owner of the company the potential for earning a higher profit overall, because the payout amount is based partially on the profits of the company in the years following the sale. The tax implications will also be less impactful with this type of transaction. Seller financing is beneficial for buyers because they gain full control of the company, rather than the bank or private equity retaining partial investments.
However, it is important for the seller to tread lightly when the idea of a management buyout is revealed. It is vital to regulate employees to ensure that they do not make any calculated moves that would give them an advantage over another buyer. For example, management could work to drive down share prices in order to create a lower purchase price for themselves. While a management buyout may be a great way of selling a business in theory, it is imperative that the process is carried out correctly in order to prevent a negative impact on the company.
In order to determine if an MBO is the right type of acquisition for you, please contact the M&A intermediaries at George & Company. We would be happy to help you sell your business in the manner that will be most beneficial to you.