Scroll to top

Overcoming the hurdles of concluding a management buy-out

bespoke - February 9, 2021

A management buy-out (MBO) can be an appealing way of taking a company forward for all parties. Nobody knows a business as well as its management team – they understand the customers and staff, as well as any challenges which will need to be addressed going forward, which will provide assurance to the outgoing owner and the company’s employees.

There is also the potential for high returns for the individuals behind the buy-out, as the opportunities and market are well known to them. It’s fair to assume that with a fair wind, they will be able to maximise the outcomes for the business in the future.

In 85% of all MBO deals, both vendor and buyer come away from the negotiations completely satisfied according to research from Coutts. So, why do MBOs often sit down the pecking order when an owner comes to exit a business?

Issues affecting MBOs

Although there is a raft of benefits which come with selling to management, MBOs aren’t without their issues. Let’s take a look at what can make an MBO fail to materialise. 

Perceptions from the existing owner

An MBO can offer the vendor the best available deal, but that doesn’t always mean the best price.

It can offer a very attractive deal structure, and by doing ‘right by the business’, help to preserve the entrepreneur’s legacy. But if an owner is adamant on getting the most money for their stake in the business, they might favour a trade sale.

More than a quarter (27%) of entrepreneurs say they’re only prepared to consider an MBO as a last resort, due to those concerns around price – but also a perceived risk that the deal could cause their relationship with the management team to deteriorate.

No one is prepared to make the first move

Sometimes an MBO won’t get off the ground due to a stalemate in initial talks. Clearly, before negotiations can begin to take place, someone has to place the MBO option firmly and squarely on the table.

However, there might be a reason why both sides are unprepared to make the first move. From the owner’s perspective, they might see it as the management team’s responsibility to float the option, with the expectation that they present a compelling case for a deal. But managers might be reluctant to open the dialogue for fear of it being seen as some sort of ‘coup’ – owners aren’t always transparent about their exit strategy.

Sometimes it takes a third party, such as an advisory firm, to plant the seed of an MBO. But, really, it shouldn’t have to come to this.

Misconceptions about personal funds required to finance a deal

Management teams might automatically assume that an MBO is beyond them because they do not have the funds to meet the consideration. However, this might not necessarily be true.

While a management team will indeed need to invest a sum of personal money for a stake in the business, very few buyouts are majority funded from the resources of the managers themselves.

In most cases, MBOs are funded through a finance package which might include bank loans, private equity, invoice finance and, more recently, a Coronavirus Business Interruption Loan (CBILS).

In June, for example, PPE designer and manufacturer, Core Protection Systems Limited (Corpro), completed a seven-figure MBO with a suite of finance options including a CBILS. 

CBILS is a government-backed scheme that can provide facilities of up to £5m for smaller businesses across the UK. CBILS supports a wide range of finance products, including term loans, overdrafts, invoice finance and asset finance facilities.

At Bespoke Commercial Finance, we can help you put together a finance package to realise your ambitions to complete an MBO. We have a range of services – including invoice finance and CBILS – which can be combined to present a compelling case for MBO. Our extensive network of lenders means we can guarantee the best deals and rates, as well as same-day decisions.

Get in touch today to find out what we can do for you.