MBO FAQs
What is a management buy-out?
A management buy-out (MBO) is the acquisition of a business by its existing management. Typically, management will establish a new holding company (a Newco), which together with a financial institution (i.e. an organisation specialising in investing in unquoted companies, often referred to as a venture capitalist or a private equity house) will purchase the shares of the target company where the management work. Variations include a management buy-in (MBI), where external management buy the business, and a buy-in management buy-out (BIMBO), which is a combination of the two.
Why should I do it?
People embark on MBOs for a variety of reasons: to make more money; to have a bigger say in their destiny; to maintain their lifestyle or simply to preserve their jobs. Typically, an MBO is triggered when a strategic decision is taken by a parent company to sell the business, for example if there's a change of control in a family run business (perhaps to family members not involved in running it) or in the case of insolvency of the company or its parent. Crucially, you should believe that you could run the business better than the existing shareholders. If you're seeking financial assistance on commercial terms, then the only motive likely to attract funding will be financial gain.
What are the characteristics of a successful MBO?
Key success features include a sound business with solid cash flow generation, high growth prospects and an experienced management team.
What's involved in doing an MBO?
The first step is to write a business plan. A worthwhile planning and communication exercise in itself, this will be used to ascertain the value of the business and attract potential funders. Doing an MBO is a specialist activity, so the early involvement of experienced advisers is strongly recommended. We've provided finance for lots of MBOs, so we can introduce you to specialists with the appropriate industry and geographical strengths. They can help with the business plan (though they won't write it for you); provide advice on bidding tactics; and perhaps conduct negotiations on your behalf (maintaining good employer and employee relations during the MBO). They can also project manage the process and negotiate the financing terms.
An MBO will involve a large number of legal agreements covering the acquisition, warranties, Newco equity terms, management service contracts, bank facilities and other commercial contracts. Again, a good adviser will steer you through the process. Whilst all this is going on, of course, you'll still have to run the business and therefore can't afford to take your eye off the ball. It can be stressful and involve long hours, but if you're already running a successful business you'll probably be used to that.
What kind of funding will I need?
An MBO involves raising equity and debt funding to pay for the acquisition, as well as bank facilities for ongoing working capital. Additional finance might also be required for capital expenditure. Since creative debt funding will reduce your need to secure more expensive equity capital, you should look to maximise this first. See our
glossary of frequently used terms.
Where can I get finance?
Bank funding represents the largest part of any MBO, so it makes sense to speak to us first. Our specialist staff in Structured Finance can talk you through the process in much more detail than we're able to give here, and in complete confidence (even on a no-name basis) with absolutely no obligation on your part.
The British Venture Capital Association (opens new window)
is also a good source of information.
How much money will I have to invest?
This depends on both the overall funding requirement and your own personal wealth. Funders will want to see that you're committed to the business – if you won't put your money where your mouth is, then why should they? In the absence of other readily realisable assets, a common rule of thumb is one year's gross remuneration. Bank of Scotland can help you with this.
Contact us
for more details.
How long does it take?
This can vary enormously from a few weeks to several years. However, a typical time frame is around six months.
Can I be fired for talking about an MBO?
In broad terms, you have a responsibility as an employee not to disclose any confidential information or to do anything that could otherwise harm the business. Seek professional advice at an early stage. In some cases, owners might actively encourage management to mount a bid, while in others they're specifically prohibited from doing so in case it puts off prospective trade purchasers who want the existing management to stay on. Business is all about management, so you shouldn't underestimate your power to insist on at least exploring the possibility of a bid.
If a proposed MBO is unsuccessful, is my job at risk?
This could depend on whether the business was sold to another party or remained under the control of its existing owners. A trade purchaser might not want to retain your services, but this could be the case whether or not you attempted an MBO. Existing owners might question your motivation. Provided you've acted properly though, this shouldn't be grounds for dismissal. As the saying goes – nothing ventured, nothing gained.
Will Bank of Scotland's finance partners have a say in the structure of the management team?
Financial institutions back people rather than assets, so they want to know that there's an experienced, balanced team running the business. If there are any weaknesses, they will want to see these addressed. As an investor, this is in your interests too. Financial institutions will generally appoint a non-executive chairman and/or a non-executive director to the board of Newco. This might be an executive of the financial institution or someone with experience either of the sector involved or the particular stage of the business' growth.
What will an MBO mean to me in terms of commitment?
As a director of a company, you'll have responsibilities to shareholders and other stakeholders. As an owner of a business, your motivation will probably change and you're likely to spend more hours in the business. There is a certain amount of truth in the saying that "it is not only the assets that sweat in an MBO". It will be a lifestyle change and it's important that you have the support of your partner.
Will it make me rich?
Embarking on an MBO will probably be the biggest financial decision of your life – even bigger than your home. Financial institutions will be looking to at least double their money within three years. They'll only do this if managers are well incentivised. Whilst the weight of their money will generally be far greater than yours, you can expect to gain a much larger multiple on your investment than they do.
This information is intended to provide only a general outline of the subjects covered. It shouldn't be regarded as comprehensive, nor sufficient for making decisions. Nor is it a substitute for professional advice. Bank of Scotland accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.
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