Pros and Cons of an MBO

There are many possible options a company can choose between when it comes to your exit. A management buyout is when your management team buys your business. It can help create a smooth transaction and can reassure business owners that they are leaving their business in capable hands. There are many advantages and disadvantages to a management buyout, and we are focusing on three pros and three cons of this exit strategy.


Pros

1. A faster, easier process

With a management buyout the exit process is often quicker as time is not wasted looking for a third party to buy your business. It is easier as your management team already possess extensive knowledge of the inner workings of your company so less due diligence is required in the transition.

2. Confidentiality

As you are keeping the sale of your business in-house, all essential information remains inside the company. This increases confidentiality which would be lost during a trade sale and interactions with a third party. This can help secure confidence with clients, suppliers, and your team that sensitive details are not divulged outside the business.

3. Good for small businesses

    Some businesses might struggle to attract trade buyers, they might have less to offer an external party. A management buyout tends to be more favourable as there is less of a cost to the business, and it can be easier to negotiate the value of the business.

    Cons

    1. Lack of ownership skills

      Even though your management team may have the knowledge and experience of running your business, they may not be equipped with the right skills for ownership. Owning a business requires a different range of skills and it can be difficult to know exactly what is needed to run a particular business. It can become quickly apparent if your management team does not possess the right skills. To get past this the exiting owner can share their experience and knowledge with their management team ensuring they are properly equipped and ready at the time of their departure from the business. Exiting owners should also consider investing in leadership development for their team, this can further help prepare them for the responsibility of running the business. Replacing the founder’s drive and direction and ensuring the team have the potential will build a strong case for investing for the future.

      2. Funding difficulties

        During a management buyout, your management team may struggle to raise sufficient funding to complete the transaction themselves. This could be due to a lack of personal wealth. Funding is sourced from banks or private equity firms can amass debt at the start of the new ownership. Other options would be for them to take personal risks to try and increase their own personal wealth, remortgaging their homes for example, but this can also cause problems for the new owners and deferred payment by the exiting owners. Agreeing a mix of funding is fundamental to the long-term success of the MBO.

        3.Risk of Insider Trading

        All parties involved in an MBO are internal and because of this there is a chance that a management executive could engage in insider trading as they have access to crucial information. This could cause future difficulties for the company. The departing owner needs to keep a close eye the firm and the sale both before and ensure the mechanisms and processes are in place to protect the business after they leave.

        An MBO can ensure that the quality services your business offers survive long after you have exited. For more information on management buyouts and other exit options and strategies read our Exit Planning Page.

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