Advantages of an MBO
So what are the advantages of an MBO? Rather than having to go to the market place to locate a trade purchaser or a private equity firm and the risks that brings, the Buyer has already been found. The Vendor should be confident of the skillset of the MBO team, assured they have the required experience and business ethics to maintain ongoing client relationships, thus preserving the legacy of
the Company. Another one of the main advantages is that confidentiality can easily be contained in-house; removing the risk of competitors finding out that the Company is on the general market and thereby reducing any detrimental effect from this being fed back to clients or staff. MBOs should allow Vendors to be more comfortable about structuring a deal over a longer period of time than they would do with an unknown 3rd party, presenting scope for higher considerations to be payable without risking the short term liquidity of the Company. The risk involved in the change of power from stakeholders can also be minimised.
Disadvantages of an MBO
As with everything in business there is another side to the argument, with the main cause against MBOs being that as the Vendor you are limiting the competitive number of Buyers to just one! A Company being marketed for sale in the open market could easily generate 8-10 genuine potential purchasers, allowing potential for an offer price to be negotiated significantly higher due to synergetic or competitive reasons. Funding is also a common problem with MBOs and can be the main cause for the deal to fail, whereas Buyers generated from open marketing would need to provide proof of funding before serious negotiations got underway. Often Vendors find themselves having to agree to a lower value deal with the MBO team than the Company is actually worth, due to limitations on the maximum amount the team can raise. Another point of caution is once discussions get underway for an MBO that the management team do not keep their eye on the ball, running the risk that the Company’s performance could suffer. Alternatively, and
even more of a concern to a Vendor, is that should the sale not proceed for whatever reason, then the Company would be left with a severely demotivated management team. If the Vendor then seeks to locate a Buyer from the general market, this instability would
have a detrimental effect on value.
The Key to Success
The starting point is to ascertain whether or not the management team have the appetite, ambition and leadership capability to grow the business, followed by access to finance, as this is often the critical part. Specialist help and advice should be sought to ensure that a succession plan is carefully implemented allowing for a flexible, staged exit to be managed.
This planning will allow sensitive issues and individual aspirations to be dealt with in a timely and methodical fashion. Working
alongside experts in this field years before implementation can ensure that the business is made as attractive as possible in order to attract the necessary finance, subsequently allowing the Vendors to achieve the full value of their Company.
Adam Croft - firstname.lastname@example.org