So what is a Management Buy-Out (MBO)?
An MBO is a transaction where a company’s management team purchases the assets and operations of the business they manage. The MBO became a popular option in the 1980’s in the United States and the trend quickly spread across the globe.
An MBO can be beneficial to everyone involved but more importantly for its manger, it provides an opportunity to do the same work while obtaining equity and building significant net worth.
The best candidate for an MBO is a company that has reached a profit ceiling because either the current owners have become complacent or they are simply stuck in their ways and are ultimately preventing an eager manager from pursuing new revenue opportunities. If these opportunities can be unlocked with an investment in organic growth or through acquisition, then the business is likely a strong candidate for an MBO.
As a manager there are a few important things to remember when embarking down the MBO path:
1. Pick an advisor you can trust
- Take your time when choosing an advisor, they should be able layout the risks, outline the MBO process and connect you with the right financial institutions to help you get your deal done. Most importantly, you should trust them.
2. Do not get caught up in the excitement of the deal
- If you lose focus on the business, you may effect revenue and/or profits and scare off lenders and/or investors. Keep your hands on the wheel.
3. Be honest about potential issues
- If you feel there is an issue within the company that may effect your ability to reach targeted growth numbers, make it known so you are not setting yourself up for failure just to get the deal done.
4. Understand your financial partners and options
- A bank has different rules than a private equity investor, discuss your options with your advisor. Don’t get greedy, one option may seem the cheapest in the short term but you are in this game for the long term and need financing that will help you get thru the inevitable ups and downs.
Finally, after a successful MBO you are now both an employee and a shareholder and now walk a fine line. No company can operate without strong leadership and although leading the business is your main role, you still have a boss. You need to be accountable to yourself and your partners and add as much value as you possibly can for yourself and your shareholders. Ultimately, your board will have the final say but now you have the opportunity to directly benefit when your business does well.