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A Management Buy Out: what is it and how does it work?

A Management Buy Out (MBO) is an underexplored form of acquisition. It is a form of acquisition in which sitting board members or members of management take over part of the company or the entire company. The buyer already knows the company well which is conducive to success. This blog provides insight into which situations are suitable for an MBO. We also discuss the advantages and disadvantages of an MBO and the steps involved in this process. Finally, we explain what we can do for you during an MBO process.

Suitable situations for an MBO

There are several situations that lend themselves perfectly to the realization of an MBO. First, this form of acquisition offers the opportunity to split off a part of a company, for example after developing a new business strategy. Another situation in which an MBO is a good solution is when no successor can be identified within the family. Through an MBO, the company remains in the hands of someone known. The same applies to a situation where the shareholders do not want to sell the company to a competitor. Usually an MBO team consists of the managing director, the financial director and two to four other directors.

Advantages and disadvantages of an MBO

When considering an MBO, it is important to weigh the pros and cons. A key advantage of an MBO is that the incumbent management knows the company well. This fosters relationships with various stakeholders and reduces the risk of harm. It also ensures that the due diligence process is limited, as the buying party is already familiar with the company and its opportunities and risks. In addition, an MBO offers new challenges to incumbent management.

Yet there are also drawbacks to an MBO that you should consider. Buying a business with an MBO can make you feel like you are paying for results that you have been responsible for as a manager or director in the past. In situations like this, we as advisors can help you put this feeling to rest. In addition, it is important to consider the possible impact o the solvency of the company. Solvency is the ratio of equity to debt. Solvency is often uncertain in the period after the acquisition. Solvency means the extent to which a company is able to meet long-term obligations and achieve long-term growth. Another risk associated with an MBO is that disagreements may arise during negotiations which may result in key individuals leaving the organization resulting in them starting their own organization and taking key customers with them.

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The steps of an MBO process

The MBO process takes on average between four and six months and consists of a number of fixed steps supplemented by specific components which are tailored to your specific situation.

We will tailor the process to your needs to make it the best it can be. The following fixed steps recur in an MBO process:

  1. Situation analysis and establishing agreements: the wishes, ambitions and objectives of the team are inventoried. This analysis then serves as the basis for the strategy and implementation of the steps in the remainder of the process. The importance of a situation analysis plays a role in every acquisition process, but it is particularly important for an MBO. Without a clear strategy and vision of the future, the management lacks the confidence of financiers which is necessary in connection with the common lack of solvency. The situation analysis is then used to establish agreements and planning. As described earlier, the seller and buyer already know each other at an MBO. The owner estimates that the management is suitable to continue the business within the company. An MBO is often the result of a favor factor of the owner towards the incumbent management. This makes time and space available to achieve a good takeover. It is crucial to lay down agreements to prevent possible misunderstandings. You can think of exclusivity for a certain period and confidentiality for a certain period. This step is concluded with the drafting of a business plan which serves as a basis for submitting a possible request for financing.
  2. Determining the value of the business: the value assessment provides insight into whether or not an MBO is expected to be feasible. This feasibility check reduces the chance of disappointment for both parties during the process. A value appraisal is a careful process in which various aspects are addressed. For this reason it is advisable to engage a corporate finance consultant for an independent valuation.
  3. Feasibility analysis: in this step, an analysis is made in various areas including the business plan, taxes and legal matters, purchase price and financing, market, organization and management team.
  4. Negotiations: an MBO involves three parties with their own interests. The management (the buyer) wants to acquire as much of the share capital as possible with as few resources as possible, the seller wants to realize the highest possible price without having to take risks in guarantees to the buyers and financiers want a return that is in proportion to the risk run. Financiers may want a share in future profits or the prospect of an attractive future exit.
  5. Letter of intent and due diligence: a letter of intent facilitates negotiations. The due diligence process is often relatively brief in an MBO because the buyer is already familiar with the organization.
  6. Concluding agreements: after negotiating the final details, the agreements are drafted. The number of agreements varies from one route to another. Examples of agreements are an acquisition agreement and a shareholders' agreement.

The role of a corporate finance advisor during an MBO

The relationship between owner and incumbent management should be good at the start of an MBO. Maintaining this good relationship is crucial for the process to run as smoothly as possible. Despite the fact that there has been good cooperation in the past, various interests come up during this process which can be diametrically opposed. We guide you in business matters and support you during the negotiations. With specialist knowledge, experience and skills we can help you during the complicated process. In addition, we take your worries off your hands. For example, an advisor will act as a confidant if tensions and emotions run high. This limits the risk of deal failure and possible consequences. Would you like to know more about the role of a corporate finance advisor during an MBO? You can contact us using the form below or our contact details on the team page under the heading 'About us'. We will be happy to discuss the possibilities for your personal situation.

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Hans MinnaarFounder and director