The advantages and disadvantages of a management buyout
A management buyout (MBO) can be an attractive succession plan for business owners as it involves your existing management buying the business from you, the current owner.
Generally, this structure is used where the majority shareholders want to retire from the business and the existing management team feel that they can develop the business further and want to take ownership of it.
A company with a good track record, good prospects for the future and a strong and dedicated management team are the fundamentals of any management buyout.
Could a management buyout be right for you?
There is a lot to think about in regards to an MBO. Each situation and business is different so you should discuss any plans in detail with your commercial lawyer who will have experience in management buyouts and their intricacies.
- You will retain talent and knowledge in the business – By allowing your management team to take control of the business they are more likely to stay committed and loyal to it rather than deciding to leave at the prospect of a new owner joining (this could affect job security, roles, team structures for example).
- Choosing this route can allow you to carry on with the day-to-day running of the business in the interim. An external buyer is more likely to require a greater degree of due diligence and information gathering which can impact your day-to-day role in the business.
- A management buyout can allow for a much smoother handover. The management team will continue to undertake their roles right up to completion when the business is legally handed over. You may even decide to continue working with the business as a consultant post-completion, which would further assist the handover (being on hand to answer specific questions, manage relationships with third parties or provide training).
- There is a reduced risk of the business failing in the future
- An MBO can be complex in terms of finding the right structure (the key individual buyers; the purchase price and funding arrangements and any potential for an earn-out or deferred payment).
- It is based on the trust you have in your team. Is your management team ready to take control? Do they have the knowledge and the experience? This is particularly important if you agree on a structure with deferred payment terms.
- A management buyout can be time-consuming. The management team may require training, ongoing assessments and feedback to prepare them for taking over and running the business.
- There is the risk of your reputation being impacted if the business is particularly reliant on you.
Ensure that you take appropriate advice from your commercial lawyer or management buyout solicitor, as well as your financial advisors from the outset and involve your advisors in getting the structure right for you.
If instead, you think that selling your business to a third party is the better option for you, then read our guide on how to sell your business.
If you are considering a management buyout, speak to our corporate and commercial team today at 01752 203500 and find out how we can help. You can also email us at enquiries@GAsolicitors.com or contact a member of our team directly.
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