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How to navigate an MBO

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Market changes have signalled a significant rise in the frequency of Management Buy-Outs (MBOs) and 2016 looks to be following suit. Although the benefits of MBOs far outweigh the challenges, some business owners can find the process daunting, particularly with multiple parties involved and potential funders to get and keep on side.

Here are some top tips on how to approach an MBO.

(1) Plan 

Getting the correct ingredients together to ensure the process is as smooth as possible takes careful thought and is worth the time investment. Remember to undertake thorough due diligence at an early stage to identify any hidden issues and flag them quickly.

(2) Assess your team 

If there are any doubts about the team at the start of the MBO process, ensure to recruit smartly to fill the long-term business need. Funders will not back a poor team, or one that lacks ambition, so it is essential that the management constitution is solid and realistic.

(3) Define the changes 

Make sure the management team really understands that the move from management to ownership is not always straight forward but it is rewarding. Often, management parties will need to contribute financially (from savings or from a personal loan) and in doing so can show real commitment and credibility to funders.

(4) Solid bookkeeping 

Ensure the business has good financial records and forecasts – no funder will be impressed by undertaking due diligence and discovering that the cash positive business that was promised, isn’t accurate. 

Read more about conducting an MBO:

(5) Drive a fair deal 

Try not to negotiate too high or too low. Both parties will want to try to get the best price possible but it is worth remembering that if a deal is not completed, the management team would want to remain in their current positions. The deal both parties should be looking for is a fair one.

(6) Start early 

Conversations with funders should be had early on to help to gauge the appetite for the transaction before anyone gets their hopes up too much.

(7) Take appropriate advice 

It is worth talking to advisers if you are unsure about all, or part of the MBO process. Seeking initial advice can pay dividends in the long run.

(8) Maintain performance 

Business performance during the negotiation stage is more important than ever and it is essential that the profitability and cash position of the business is not effected by a lack of focus by owners or management. It is often necessary for the management team to have a designated leader who deals with the discussions whilst the other members of the team ensure the business remains strong operationally.

When embarking on an MBO, it is likely that other issues will arise when undertaking negotiations of this nature. However, with a strong business model and plan, sound financial records and owners and managers who are eager to complete the deal, the odds are weighed in your favour.

Before you put your business up for sale, however, consider whether you really should undergo an MBO.

Duncan James is corporate partner at Shakespeare Martineau.

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