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MBO's Private Equity Backed Deals Succession Planning

MBO’s : Often The Best Option

For owner-managers who have built up businesses over several decades through to large PLCs with subsidiaries that are no longer core to their operations, some form of management buy-out (“MBO”) may be the right option. For a management team an MBO can offer them the chance to own the business that they have helped to grow. 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 management buyout is just one option available to business owners looking to reduce their financial exposure and their workload, but if it is the right option there are numerous forms it can take. Owners often do not realise how good the MBO option can be. Sometimes they may feel their team is not quite strong enough, but new senior management can be attracted as part of the deal if required. 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 less cash in the deal. As such, the value can often be at least as high as a sale to the trade.
Once a value has been agreed for the deal, the key issue is how the transaction will be funded. This funding can come via a number of sources including various types of debt or a private equity investment and will be a key factor in how the buyout is structured. An experienced corporate finance adviser can both help prepare the business for seeking funding and also 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. Such vendor financed MBOs can allow ongoing independence for the business and be an ideal form of succession planning, where the exiting owner retains an interest in the business for a period after handing control over to the team. Again, 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.

Brian Higgins | Partner

— North West Business Insider

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