Management Buyout… is this the right exit option?

July 8, 2015|Corey Vanderpoel

There are numerous options to consider when looking to exit your business. These include selling to private equity or another corporation, succeeding to the next generation, forming an employee stock ownership plan (ESOP), continuing to own the business with hired management (although this doesn’t necessarily remove you from ownership), or executing a full or partial sale to management – otherwise known as a management buyout (MBO).

MBOs have been around for a long time, and they’ve gained popularity in recent years because of the positive business environment, availability and affordability of funding, interest of private equity in teaming with management, and an increasing entrepreneurial nature of managers. This has led to an overall increase in M&A transactions and population of buyers.

Business owners often pursue an MBO because it meets their critical objectives, and they typically consider an MBO for a number of reasons:

  • Confidentiality
  • Simplicity
  • Trust
  • Ability to reward long-term managers
  • Unfamiliarity with the selling process

While these factors should all be considered during an exit process, experienced advisors can address these while also focusing on another traditionally important topic: maximizing value.

Additional advantages of MBOs:

  • No broad marketing process to sell your company, which saves time and money
  • Limited confidentiality risk since you are not including outside buyers (although it could potentially add to the internal confidentiality risk)
  • Buyer understands the business, having been involved in it
  • Possible shorter due diligence period as management knows the business (although it can have opposite effect because they’re not experienced with buying a business, entrepreneurial risk, capital structuring or transactional mechanics)
  • Employees are often retained with limited changes post-transaction
  • If you own the real estate, oftentimes a long-term lease can be executed
  • Satisfaction in seeing the company continue under management and the opportunity for managers to build wealth

Disadvantages of MBOs:

  • No other options that provide negotiating leverage (with a pure MBO; could consider combining managers with other potential buyers)
  • Limited financial resources as a high amount of seller financing is common; could introduce private equity to mitigate risk but they would traditionally control the company versus the managers
    • Lower overall price is common in MBOs
     
  • Risk/responsibility of ownership is a noteworthy change for managers – collecting a paycheck is very different than now being responsible for paying others (this observation is often realized well into the process and could derail interest in the MBO)
  • Managers need helpful advisors since they’re not experienced in transactions, which could drive high fees to which they’re not accustomed.
  • Conflicts among seller and managers when interests are misaligned among the parties
    • Seller wants high price and seller-favorable terms, while the manager wants a low price and buyer-favorable terms
    • Managers are distracted and can be pulled from their day-to-day roles, which can affect the company
    • Tough negotiations are difficult because of the day-to-day work relationship

An MBO can be a viable solution for selling your business, but it comes with its advantages and disadvantages. These should be fully understood before making a decision. Ultimately, selling a business is very complex, and an experienced advisor can help determine whether an MBO is right for your situation and objectives.

If you are thinking of selling your business in the next several years, now is the time to get started. Our Schenck M&A Solutions team can help you to understand your specific options. Contact Corey Vanderpoel at 414-465-5607 or corey.vanderpoel@schencksc.com to learn more.


Corey Vanderpoel, a Managing Director of Schenck M&A Solutions, has extensive M&A experience includes preparing companies for sale and creating value prior to a sale, developing sell-side and buy-side strategies and marketing processes, contacting potential targets, executing auction processes, and negotiating transaction terms. 

Securities offered through Burch & Company, Inc., member FINRA / SiPC. Burch & Company and Schenck M&A Solutions are not affiliated entities. Corey Vanderpoel of Schenck M&A Solutions is a registered investment banking representative with Burch & Company.