Selling a company through a management buy-out wins in popularity the recent years. But what exactly does this acquisition process look like?
During a management buy-out (MBO) one or more members of the management team acquire the shares of the seller. For a long period of time this seemed to be reserved for multinationals such as Philips, Shell or ASML, who for example sell a loss-making division of the company to the management. However, management buy-outs are an increasingly frequent event for small and medium-sized enterprises. In those cases the business is taken over from the director/major shareholder by the current management of the company.
Financing a company takeover
This trend is strongly related to the current challenging market circumstances, the uncertainties concerning the future results and subsequently the critical attitude of financing parties of business takeovers, such as banks. The seller must take into account lower proceeds from sale in combination with an earn-out arrangement and/or a vendor loan.
The desire to sell the company regardless of the circumstances, makes the management an interesting takeover candidate. They possess firm-specific knowledge and have a clear view on future developments. The selling entrepreneur benefits more when the selling party is well-aware of the company and has a good connection with the shareholders, than when an unknown third party is the buyer. In case of an earn-out arrangement or a vendor loan, the involvement and firm-specific knowledge of the buyer is even more important.
Also in case of a management buy-out it is of the outmost importance to organize the process with great care. Both the buying and selling party need to be represented by an independent advisor. These advisors have to ensure the successfulness of the process.
Therefore it is important that the (advisor of the) seller in advance clearly communicates in which manner he is willing to make a deal with the management. This management of expectations is very important, since there is a real risk of failure. When the management buy-out fails to succeed, there could be disappointment in such a way, both for the seller as for the management, that this deception gets in the way of a sale to a third party and the well-functioning of the company.
Selling process of a management buy-out
The selling process of a management buy-out deviates only slightly from an external sales process. The main actions of such a business acquisition concern drafting a business valuation, the agreement on transaction terms, drafting business acquisition contracts and obtaining the takeover financing for the management buy-out.
Erik Smidt is the director of Match Plan Corporate Finance