You may think a management buyout sounds like the management team is getting “taken out”. On the contrary, it is the exact opposite.
Often the company begins with the owners being the management team. As time passes and the company grows, new non-owning management members are added, or a second or third generation of family members inherit the business, but are not managing it.
When it comes time for the owner to sell the business, the natural thought is to “sell it to the highest bidder”. This is often done as a part of the “auction” process. Sometimes this makes sense, but other times it does not.
The advantages of selling to the highest bidder include a potential higher valuation. However, a huge disadvantage is that during the selling process the company’s financials and customers’ identity may become known to interested buyers — maybe even your competitors.
Advantages when selling to your management team via an MBO
The management team is an informed buyer. The managers know the business and growth opportunities better than anyone. They are likely to pay a reasonable price because they are confident in their knowledge of the company and their ability to execute growth strategies.
Also, the due diligence phase is typically faster and less intrusive when selling to the management. Management is familiar with the ins and outs and ups and downs of the company.
If you sell your business to an outsider, you may have several potential suitors digging through significant financial and operational details, as they obviously need to know what they are buying.
Ultimately, selling to an outsider will most likely take longer to close a transaction relative to selling to the management team. For these reasons, owners should consider a willing management team as a valid exit option, and not a last resort.
Other advantages of an Management Buyout
By selling to your management, you are rewarding the people who helped make you successful. You are changing their lives and giving them a shot at the American dream.
But just like any important decision with several options, there are pros and cons to a true “auction” process versus an “MBO”. Either situation will make more sense given different dynamics. That said there are certain transactions that are clearly best suited to an MBO.
So, as you seek to exit your company, it is wise to have an MBO as one of the serious options to consider. Talk with the management and get their thoughts before making a decision on which path to take (i.e. MBO or auction process to an outsider).
Then, talk with potential financial partners who can assist you and the management team in the creation of a financial solution that will work for all parties.
Often, the capital needed for ownership to change hands is available. The financial partner gets a good return for its investment, while a clear path for its exit is structured up front.
Owners get paid, the management team acquires controlling interest, and the financial partner is compensated for the service it provides. All parties benefit.