Management Buyouts are a great option, but consider the risks

/in , /by Adam Wiskind

One of the more attractive exit options for you as a business owner is a management buyout (MBO). That is when your management team works together to buy either a total or a majority stake in your company, thus taking control of the company themselves.

There are several benefits to selling your company to your management team:

  • You can reward loyal managers with an opportunity to gain equity in the company. Managers are more likely to maintain the corporate culture and honor your legacy than an unknown buyer.
  • The management team already knows the company intimately, so you’ll have less to disclose; and the managers will be less concerned about due diligence, representations and warranties, and indemnity.
  • The management team has experience in the business, so you’ll have less of an obligation to train them and can transition out of the business faster after the sale.
  • Information about the company can remain more confidential as sensitive information does not have to be divulged to external parties.
  • Though you may not get a strategic price premium for the business, you should at least get fair market value.
  • With thoughtful planning and early preparation, the sale can be carried out on your timeframe.

However, management buyouts also present some unique risks that must be addressed to avoid derailing the deal.

Management Team Composition

Even if they are effective managers not all teams have the collaboration, leadership, financial positions, and motivation to acquire a business. You should make an unbiased assessment of your management team’s abilities and plans prior to committing to sell your business to them. Many of the tips found in this article on assessing buyer prospects apply to MBO teams as well. Also, be aware of managers who are not invited to join the MBO team, as they can disrupt a deal that they feel that they should have participated in.

Team Organization

MBO team members have very often not acquired a business before. They may need professional help to organize themselves to write a business plan, create a shareholder agreement and locate financing. The team will need to consider how their positions and responsibilities will change once they become owners.

Business Performance

The MBO team needs to maintain the profits and prospects of the company while they are navigating the deal process. A deterioration in business performance could scare off financial backers of the transaction and put undue stress on the deal.

Plan for Failure

Clearly there are benefits to selling your business to your management team rather than to an unknown buyer; however, if the deal with management falls apart, the repercussions can be severe. What happens to your business value if one or more of your managers leaves because of a deal gone bad?  Be sure to have contingency plans in case the buyout doesn’t work.

Having the right professional advisors increases the likelihood of a successful buyout. For advice on exit planning or selling a business, contact Adam Wiskind, Advisor at Exit Strategies Group, Inc., at awiskind@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.