For many owners, the thought of selling their business is a painful one. After years of building up the business from scratch, it is a difficult decision to pass over the reins to someone else.
Other than the obvious emotional issues around selling your business, there are numerous other factors which may make a potential sale more difficult to handle. For example, where the most likely buyers for your business are fierce competitors, you may simply not wish to sell to someone with whom you have a less than positive relationship. On the other hand, certain businesses may have no obvious buyer. Examples of this include businesses where their true value lies in the fact that they are independent, therefore selling to a larger competitor or third-party corporate is unlikely to yield sufficient value for the owner.
In these scenarios, a management buy-out may form a neat solution.
What is a management buy-out?
In very simple terms, a management buy-out is when the existing management team of a business acquires the company from its current owners. More complex, however, is the way in which a management buy-out is funded and structured.
The structure is likely to be driven by the price of the deal, in addition to the owner’s flexibility around the timing of cash out.
The management team will be required to prepare a business plan and approach funders, whether these are in the form of debt providers or equity providers (such as private equity). The owner may also help to bridge the funding gap by deferring some of the price until a later date, commonly by converting some of their equity into a debt instrument or by maintaining an equity stake going forward.
How to initiate a management buyout?
It’s common that management buy-outs are initiated by the current owner of the business, particularly where they have a very positive relationship with the existing management team. This can be as simple as having an open conversation with your management team to understand whether they have the desire and appetite to acquire the business.
If it becomes clear that there is appetite within your management team, the next step is to agree the headline terms of a deal for the sale. The best way of doing this is to agree a detailed set of Heads of Terms which outline key items such as the price, timetable, and any conditionality attached to the management team’s offer. This will help to streamline the process by agreeing the main points at an early stage, preventing difficult conversations at a later date. Once these Heads of Terms are in place, you can provide the management team with authority to approach potential funders for the deal as required.
Selling a business is never easy, and in certain situations a sale to an external third-party may not feel viable. In these scenarios, a management buy-out can often be an excellent alternative, allowing an owner to exit the business in the full knowledge that it is going to a good home, whilst achieving a suitable price for the business.