Is an MBO for you?

That opportunity you’ve worked so hard for finally comes knocking at your office door and yes, it comes in the format of a “for sale” sign.

Before you say yes, may want to consider if ownership is really for you. 

Every month for the last X number of years, a salary has made its way into your bank account allowing you to pay the mortgage and have the odd well-deserved exotic holiday. This has happened no matter what the funding problems your business was experiencing because the payroll was always honoured (even when the boss’s salary remained unpaid). 

Of course the boss got some quite nice dividends now and them but don’t forget the lean years. And then, it wasn’t your home pledged to the bank to support the loan or overdraft. So, although you may undoubtedly have worried about the business performance, the worst case scenario would have been you lost your job (not pleasant but not insurmountable). You’ve never had several families depending on you keeping the business going through difficult times.

Those days have now passed and a successful company sits waiting to be bought.

It’s your belief that, without your input, it wouldn’t be in the state it is in. However, although the boss may help with funding (ie: wait for some of the value) or may even offer a small discount, it’s unlikely he’ll let you buy the business at a price way under what he may get at a trade sale. 

Personal guarantees are almost de rigour now for an MBO and you may need to pledge your family home.

To make an MBO work, you need to have the following in place as a minimum:

1) A team, an MBO rarely works if one person alone is the buyer

2) A clear leader

3) Sufficient funds for working capital to cover the worst-case scenario

4) A reduction in the MBO teams remuneration while the “new venture” gets up and running

5) A first-class management information system 

6) A good non-executive director

This is by no means a finite list but it will get you off to a better start and may get you through the first painful 12 months.

Jo Haigh is head of FDS corporate finance services. She is the author of The Financial Times Guide to Finance for Non–Financial Managers, which gives you the confidence to ask the right business questions, make the correct finance decisions and competently speak the language of commerce to your colleagues, managers, customers and stakeholders.

Jo can be contacted on 01484 860 501/07850 475 878 or fdsgroup@jo-haigh.com

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