The Advantages And Disadvantages Of A Management Buyout

Selling a business is a complicated affair, notwithstanding the personal connections you may feel to a company you have helped shape for some time. Even with the decisions you have to make with regard to your assets, workforce and sale contract, finding the right buyer is often the most difficult part of the whole process – with expensive marketing bills frequently racked up in the public search for one.

This is where Management Buyouts, or MBOs, could come in for your business. Simply put, a management buyout is the purchase of your business by its existing management team. If conducted smoothly, an MBO offers you an elegant way to leave your business while keeping it in safe hands for the future. However, there are various disadvantages to the process that you could well come across. Here we’ll explore some of the pros and cons of a management buyout, so you can make an informed decision on the sale of your business.

The Advantages of an MBO

The first, and perhaps most obvious, advantage of a management buyout is the knowledge and experience your buyers already hold about the business. Perhaps they’ve been working well together for some years and are crucial to the ongoing profitability of the company. If you are particularly invested in the future success of your business, and intend to retain some form of equity stake, it may be in your best interests to sell to your management team.

Secondly, the sale of your business can occur at a much quicker rate than a conventional trade sale. The steps involved in securing a buyer can be arduous and expensive, and certain privileges your business enjoys may be lost in the process – such as confidentiality. With an MBO, negotiations with the management team can ensure trade secrets stay within the business, as opposed to being revealed to a new network of business owners in a trade sale process.

The Disadvantages of an MBO

Despite the considerable experience and industry knowledge your management team may have, it’s entirely possible they will be significantly less experienced in business-owning. As salaried employees and not business owners themselves, they may not immediately have the capital to enact a management buyout, not to mention prior contacts with other businesses that often increase the credentials of a trade buyer.

This inexperience, and the possibility of individual managers putting their personal capital at risk in order to afford the business, could have detrimental effects on your business and its sale price – and perhaps even the sale itself. If the sale falls through, whether for lack of funds or a breakdown in negotiations, in can be difficult to continue the business until another buyer is found, with that same team still acting in management capacity.

Conclusion

Business sales are nuanced, and no two businesses are the same – so whether or not an MBO could work for you is down to you alone. The key questions you need to ask yourself in case of an MBO are “is this team ready to run a business?”, “can this team afford to run this business?”, and ultimately, “would I be happy for this team to run my business?”