Management buyouts (MBOs) are often attractive options for business owners who want to sell and for senior members of the business who want to become owners.
An MBO is where the business’s existing managers acquire all (or a large part of) the business. There are a few differences to the acquisition process of MBOs. One is that the sale is not at ‘arm’s length’. In other words, the parties know each other and are not unaffiliated or unconnected. This simple fact provides both advantages and disadvantages in that it:
Reduces the need for significant due diligence. Due diligence is an investigation carried out by the buyer of a business into its assets, liabilities, business operations and commercial potential. Typically, the managers will have a good understanding of the business. Consequently, due diligence will be more straightforward, and it may concentrate on financial due diligence and major legal issues, for example, property arrangements, a review of material contracts, employment issues and any disputes or litigation. Given that due diligence is one of the most time-consuming tasks of the acquisition process, it should be more focused and streamlined in an MBO. This should speed up the deal and reduce costs. However, if the MBO is being funded by a bank, a more detailed due diligence may be required.
May result in more difficult conversations. As both the buyer and seller know each other, sensitive commercial discussions around issues such the purchase price can be more difficult. It is advisable for the parties to appoint sperate legal advisers and for any negotiations or discussions to be overseen and led by professional advisors (such as accountants and solicitors) in order to minimise the risks of working relationships being soured.
Seamless transfer An MBO should provide much continuity to business operations and ensure a seamless transfer to new owners. The new owners will be able to implement any changes or developments with the benefit of knowing the business and which key areas can be improved.
