What are the Main Barriers to a Successful Management Buy Out?

When a business owner comes to sell their stake in a business, there are a number of options available to them – each of which come with their own benefits. One particularly beneficial form of business sale can be found in the management buy out, or MBO, wherein a pre-existing management team collaborate to purchase a business from below. However, even with the benefits of such an agreement, there are some significant barriers that buyer and seller alike must overcome. 

The Price

For the seller, one of the biggest obstacles to fielding a successful bid from a management buy out team can be the price. Setting the price for a business is a difficult enough process, requiring a comprehensive understanding of the business’ financial situation, liquid assets and market standing to create anything close to an accurate sum. Meanwhile, management buy out teams are less likely to have the capital available to compete with potential offers from larger publicly-trading businesses. 

Management teams will have less spending power than other potential candidates for a sale, but there are non-monetary benefits that can outstrip the difference in available capital between the two options. For example, if the business is something of a family business, there can be a personal aspect to any sale; management buy outs ensure the business is left in the capable hands of the team that have been running it day to day, giving it the best chance of continuing as it has.

Offering the business up to public tender may also require the business to reveal confidential information or trade secrets, opening up the possibility of other businesses capitalising from the release of such information and the business for sale losing its stake in the market – affecting future returns of the owner chooses to retain shares.

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Funding

For the buyer, price is also a concern, but for a different reason. Even if the business owner is willing to accept a lower offer from a management buy out team, the company’s value is likely to be significant enough to require third-party investment. The amount a management team is able to borrow will directly affect the amount they can offer for the purchase of the business. In some cases, this may simply not be enough for the owner.

It is incumbent on the buy out team to secure adequate funding to be able to tender an offer for the business, whether by seeking private investment or unsecured business loans. Securing funding from a variety of disparate sources can help teams build a relatively competitive offer, but will require diligent administration even after the sale.

Legal RequirementsLastly, there is an acute legal element to any business transaction, and management buy outs are no different. The company’s governing documents may preclude the facilitation of any form of management buy out to begin with. Close scrutiny of governing documents should be carried out even with shareholder support for an MBO, to ensure the transaction is a legal one.