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Black and white photo of Brian Higgins wearing shirt and tie

MBO’s – Often the best option

Brian Higgins, a partner at Rickitt Mitchell & Partners Ltd, says when a business owner, whether the owner-manager of an SME or the holding company of a large PLC, comes to consider the potential sale of a business, some form of management buyout (MBO) may be the right option. It is also an option that can be explored alongside other options such as trade sale or even IPO.

Where an MBO is thought potentially to be the right option there are numerous forms it can take, and owners often do not realise how good the MBO option can be. Owners also sometimes overplay issues that are relatively easily dealt with, such as where the next tier of management team is not considered quite strong enough. New senior management can be attracted as part of the deal if required and there are plenty of recruitment firms that specialise in this level of placements.

For the management team an MBO can offer them the chance to own the business that they have helped to grow and that they know intimately well. This de-risks the deal for them but also gives the owner an opportunity to limit the warranty coverage that might be given as part of the deal.

Rickitt Mitchell has advised on a range of MBOs, from private equity backed deals where the management team take a minority position through to family succession deals where both family and non-family management members take full control with no external equity funder. Our approach is to tailor the deal to fit the aims of our client.

A sale to a trade buyer inevitably tells members of your market that your business is up for sale and often requires educating a professionally cynical audience about the value of your company. With a sale to the existing management everything can remain confidential and the MBO team has the advantage of understanding the real value of the business, as well as personally risking a relatively low amount, often in the region of a year’s salary. The value of a sale to a management team can often be at least as high as a sale to the trade because of the ability to leverage the business’s own fundraising capacity and the use of deal structuring.

The funding for an MBO can come via several sources including various types of debt, including future amounts owed to the vendor, as well as equity such as from a private equity fund or the vendor. Where the funding comes from can have a significant impact on the business’s future plans and this needs to be considered carefully.

An experienced corporate finance adviser can both help prepare the business for raising the necessary funding and advise on the most appropriate funding structure. Where the current owner and the team are looking to minimise the impact of external influence on the business it is common for the vendor to choose to help fund the transaction. In such circumstances an experienced adviser can provide guidance on the appropriate balance of control for the management team and protection for the vendor until full payment has been made for the business.

— North West Business Insider

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21.11.19