Knowledge base item

What is a Management Buy In?

A Management Buy In (MBI) is a form of business acquisition in which one or more external buyers buy into the company by acquiring part or all of the owner's shares. This often involves a partial stake, but a 100% equity stake also occurs. You have seen this term before in the blog: What is corporate finance? This time we will take a closer look at this form of company acquisition and will, among other things, provide insight into which situations are suitable for an MBI, which steps are involved in the process and what we can do for you during such a process.

What does the roadmap for a management buy in look like?

The steps in an MBI process are similar to those of an MBO. The following steps are usually part of the process:

  1. Preparatory phase: To increase the chances of success of an MBI, it is important to make the right preparations and to start with a thorough analysis of the target. This analysis includes gathering information about the seller, competitors, suppliers, customers, the market, the company's business model, and financial data. By collecting this information, a better picture of the possible risks and opportunities of the MBI can be created. It is also important to take stock of the ambitions and objectives of realizing an MBI.
  2. Value assessment of the company: the thorough analysis performed in the preparatory phase is very important for making an assessment of the value of the company. This is an important aspect in the preparation because a valuation provides insight into the feasibility of the intended MBI. The valuation of a company depends on the interest that an MBI candidate wants to acquire. If it concerns a minority interest of 20%, this does not automatically mean that the value is 20% of the total company. This depends, among other things, on the control rights and the type of shares. We can assist you in preparing a valuation.
  3. Negotiations: Based on a comprehensive analysis and indicative valuation, an offer can then be made. Initially this will be a non-binding offer, on the basis of which negotiations will start. With an MBI there is often competition from other interested parties. It is therefore important to conduct the negotiations in a proper manner, so that you are the "favorite" and at the same time defend your own interests. If an agreement is reached between the parties, a letter of intent will be signed, after which the due diligence starts.
  4. Letter of Intent and Book Audit: The Letter of Intent establishes the buyer's intention to enter into a transaction with each other and to negotiate about it. In this statement, agreements on the negotiation process are recorded, as well as important issues on which agreement has been reached. The next step is a due diligence, in which the buyer who signed the declaration of intent gets exclusivity. In this phase the MBI candidate gains insight into the legal, fiscal and financial data of the company.
  5. Transaction Documentation: If no extraneous results emerge during the book review and agreement has been reached on the terms of the deal, the transaction documentation can be put in order. The transaction documentation that needs to be prepared differs per route. Examples include a shareholders agreement and purchase agreement.
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In what situations is a management buy in a good option?

There are several situations that are suitable for realizing an MBI. From the company's perspective, an MBI can be a solution to certain challenges that a company faces. For example, there are situations where a company is in need of a change in management in order to realize growth in the future. This situation can arise due to a lack of vision for the future or because the current management is simply not capable of taking the company to the next level. A change in management can have a positive influence on this, because someone with experience as an entrepreneur can add a lot to an existing company. In addition, it is sometimes necessary to make changes in management to ensure the continuity of the business. From the perspective of the MBI candidate, an MBI can be interesting if there is a lot of growth potential in the company, so that the company can be sold for a higher price in the future. If the current management is not able to manage this potential, then an MBI can be a win-win situation for both parties. In addition, new management can provide a new impetus to the company by adding experience, network and knowledge.

What are the pitfalls of a Management Buy In?

  1. The enterprise is too dependent on the current management. If the company is too dependent on the current management, a change in the management may endanger the continuity of the company. It is therefore important to understand in advance to what extent this dependence applies to the target.
  2. Funding options have not been identified. It is important to map out what is financially possible in good time. In addition, you must also consider the contribution of your own financial resources. If you have made this clear in advance, you can respond more quickly to opportunities that arise.
  3. Conducting the negotiation yourself. The interests of the buying party are often diametrically opposed to those of the selling party. Yet after reaching a deal, they will have to work together. As a result, many negotiations fail to achieve the desired result. This is because the conflicting interests of both parties prevail, instead of what binds them together. It is therefore important to use the right strategy in this phase of the process. An experienced advisor can support you in this process, so that the negotiations are steered in the right direction.
  4. Not being critical enough. Situations arise in which entrepreneurs are blazingly enthusiastic about the business, with the result that the target is viewed through rose-colored glasses and weaknesses are glossed over. This makes the buyer's position weak. As a result, there is often too much conceding during negotiations and this can ultimately lead to an overpriced deal.

What options are there regarding the financial piece surrounding a management buy in?

In most cases, an MBI candidate must bring in their own financial resources to complete the deal. In this way, the entrepreneur shows a certain commitment to the company and the risks involved in the investment have been carefully considered. The own contribution often forms the basis for financing an MBI, however, in many cases additional financing is required. There are various options for financing an MBI. This can be done through bank financing, although this form of financing is used less and less. Much more often a construction is devised via the seller. This may be a subordinated loan, in which a portion of the purchase price is placed in a loan from the seller to the buyer, but also through an earn-out construction. In this case the seller receives a subsequent payment depending on the results. Other options include attracting an additional investor, such as a private equity firm, or deferred financing. In the latter case, the acquisition is carried out in parts. Sometimes this can be a combination of an MBO and MBI, for example when an MBO candidate attracts an additional investor to finance the acquisition.

What is the role of a corporate finance advisor during an MBI?

The MBI process is often a time-consuming and lengthy one. In order to make the process as efficient as possible, it is wise to engage an independent advisor. During an MBI we can support you in several areas. We help you determine the right price by means of a valuation and we assist you during the negotiations in the process. In addition, we also take on the general process management, ensuring that the process is steered in the right direction. Would you like more information on what we can add to an MBI process or schedule a no-obligation introductory meeting? You can contact us via the form below or via the contact details.

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Hans MinnaarFounder and director

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