Management Buyouts Explained

A management buyout is where a business is sold to its management team. It is an alternative to selling the business to a third party or merging it with another company. Management buyouts can also be an alternative to a business going into liquidation.

In most cases, the management team buying the company takes control of the operations, assets, and liabilities of the business.

Common Situations Where Management Buyouts Occur

• The parent company wants to sell part of its business or a business it owns.
• The business owner wants to retire or pursue other interests/opportunities.
• To take a publicly traded company private.
• Where a company is in receivership or close to receivership but has the potential to emerge stronger and more stable.
• When the management team believes the business could be achieving more.

The Benefits of Management Buyouts

Retained Knowledge

The management team buying the business is already familiar with the staff, customers, and operations.

Motivated for Success

There is enhanced motivation for the management team as they now have a personal stake in the success of the business that goes beyond salaries and benefits.

Growth Rewards

The management team will get the rewards of business growth. This could be dividends, for example, or an increase in the value of the business.

Reduced Business Ownership Risks

Individuals on the management team buying the business can become entrepreneurs/business owners without the risks that come with launching and running a start-up or purchasing a third-party business they are not 100 percent familiar with.

Faster Process

The process is often faster than selling the business to a third party as there is no need to spend time finding an interested and suitable buyer.

Appealing to Founders

Management buyouts can meet the wishes and requirements of retiring owners who prefer to sell the business to a team they know and trust.

Business as Usual

The transfer of ownership can be seamless for customers, employees, and other stakeholders as the management team is already involved with the company and its operations. While there is a change of ownership, stakeholders will find comfort that it is business as usual.

Protecting Confidential Information

Confidential information can be kept private within the business. This is unlike a traditional sales negotiation where the buyer is a third party. Third-party buyers will rightly insist on getting as much information about the business as they can, including proprietary information. This is not usually necessary in a management buyout situation, as the management team is already on the inside.

Streamlined Due Diligence

Due diligence processes are often faster as there are established relationships and trust on both sides of the transaction.

The Risks and Challenges of Management Buyouts

Confidence of Funders

Funding is usually required in management buyouts. If the business is not performing to its potential or is in trading/financial difficulties, potential funders might have concerns about the role of the management team. There might also be questions about the ability of the existing management team to improve performance and/or turn the business around.

Ownership Struggles

Individuals on management buyout teams can struggle with the transition from employee to business owner and the added stresses and responsibilities that this involves.

Founder’s Shadow

There can be situations where potential funders are concerned about the management team’s ability to fully replace the strong influence the current owner has on the business and its success.

Risking Personal Assets

Individuals on the management buyout team who don’t have suitable liquid capital might have to provide collateral to help secure the funding. This can put personal assets at risk, such as their home or pension.

Difference Between Management Buyout and Management Buy-In

From a financial point of view, management buyouts and management buy-ins are the same, i.e., they involve a management team coming together to purchase a business. The main difference is who is buying the business:

• Buyout – in a management buyout, the business is bought by the existing management team.
• Buy-in – in a management buy-in, an external management team purchases the company.

Key Steps in a Management Buyout Process

As with all complex business transactions, especially those that involve multiple people, there are many steps and stages. The following is an overview of the key steps.

Participants

A crucial starting point is to ensure there is support and cooperation from the existing owners and the team proposing to buy the business. Decisions don’t need to be taken at this stage, but support and cooperation in exploring the potential of a deal are essential.

Price

The sales price needs to be negotiated and agreed upon. An independent valuation of the business is often required at this point in the process.

Funding

The management team buying the business needs to source funding. This can include funds directly from the management team’s individual personal assets. However, additional funding is typically required, usually in the form of loans or equity investment.

A business plan, financial forecasts, and other documentation will be required as part of the process to source funding.

Due Diligence

As in other business sales and acquisitions, due diligence is essential. That said, the process is often more streamlined in a management buyout situation as both sides of the transaction already have intimate knowledge of the business.

Ownership Transfer

An essential final stage of the process is to complete the transaction. It’s at this stage that ownership of the business changes hands.

Management Buyout Support at Gilroy Gannon

Expert support and advice are essential in any management buyout situation, not least because of the financial, legal, and tax implications.

We have extensive experience in supporting and facilitating management buyouts for companies in a range of industries. Whether you are an owner/founder on the sell side or part of the management team on the buy side, get in touch to arrange a consultation.