Could a Management Buy-Out (‘MBO’) be right for you, your family and your business?
Having built up a successful family business, you may now be thinking about succession and how to realise the value you have created.
There are many routes to realising the company’s value, which usually is sale to a competitor. However, is a sale to a competitor the right approach for you and your business? To determine this, the question you should ask is ‘What do you want your personal, family and business future to look like?’
An alternative option to realising value is a MBO.
A MBO is where the business is sold to the Management team, primarily funded through a combination of debt raised against the business, equity rollover and loan notes or preference shares.
MBO’s enable shareholders to extract equity value and de-risk in a controlled manner and to pass ownership onto the next family generation or management team so they can continue to grow the business and generate future value.
MBO’s are a fantastic option to protect the legacy of the business and the future of the workforce (essentially an ‘extended family’). MBO’s also help to incentivise the next tier of management; which may be the next generation within your family or your loyal staff that have helped to develop the business to where it is today (or both).
Careful planning is required to ensure that the next tier management team have the drive and ability to take on additional responsibility and help the business to pay down potential debt raised as part of the MBO.
With MBO’s, current shareholders don’t necessarily need to sell 100% of ownership, and in certain circumstances you could still be the largest individual shareholder, having the ability to say no to key future business decisions. This can help in phasing an exit plan for current shareholders whilst overseeing the next tier of management as they grow into their new roles.
Are there any downsides?
A sale to a competitor will typically generate a higher value for shareholders paid on day one. Although, if you see high growth in the future business under a new management team, an MBO can provide a much higher value to the family, but over a longer period.
The level of cash paid to shareholders on day one through a MBO will be limited to the excess cash in the business and the level of debt that can be raised against the business. This needs to be fully appraised through detailed forward-looking financial projections to ensure the business doesn’t become over-geared, which may stifle future growth or put the business at risk.
What if the next tier management or the next generation is not ready? Teams may need strengthening or may require additional guidance as they grow into their roles – in a lot of situations, shareholders are positively surprised.
Careful tax planning is required for MBO’s to ensure they are structured in the most efficient way to benefit from the most effective tax rates, and practical advice around the impact on Inheritance Tax should also be sought.