Management Buyouts (MBOs)

A management buyout (MBO) makes selling a business much easier. The downside, of course, is that management will not see the additional value that a third-party strategic buyer would see and so the selling price will be lower. Sellers can, however, realize a higher price if a private equity firm is involved in financing the deal and has a business that can benefit from synergies. Selling to a private equity firm and management is often a great solution with many benefits.

If you are an advisor with a client interested in doing a management buyout, please contact me. (Business owners working with an advisor to prepare their business for transition are asked to have their advisors contact me for an introductory discussion.) My fees for assisting with MBOs may be hourly, a success fee, or a combination thereof, depending on the unique situation.

General MBO Advice

The following are a few important points for business owners interested in doing an MBO. I invite advisors to share them with their clients.

  • When a business owner is considering an MBO, it is absolutely critical that all the key employees get along. If there is any friction among them now, it will cause problems after the sale.
  • If you’re bringing a private equity firm into the deal, make sure the firm’s culture fits that of your company. If the PE group has a history of selling after a couple of years, will that work?
  • Make sure your management team’s spouses are supportive. If they aren’t, the MBO is not going to happen.
  • You still have to prepare the company for sale when doing an MBO. Management won’t pay full market price if, for example, you’ve deferred on maintenance. Get the business in the best shape possible first, which will also benefit you if the MBO doesn’t work out and you have to sell to a third party.
  • A private equity group will not provide all the financing. They want the management team to be motivated to grow the business. Employees don’t have to invest a lot of money but they do have to invest a lot of money relative to their net worth.