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Looking to sell your business? Find out if a Management Buy-out is right for you

March 25, 2015

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I would like to start by pointing out that there are lots of paths to divesting one’s business. You can sell it to a competitor, take it to market or run it until it eventually winds down. One option worth looking at is a management buy-out (MBO).

Transfer of keys

A MBO is where a business owner sells the business to a manager, or group of managers, who are currently employed in the business. This option makes sense from a number of perspectives. First, you have the opportunity to pass the business on to a new generation of individuals who helped you build it. Second, it allows flexibility on how and when you will exit. In theory, MBOs are a great idea; however, there can be a multitude of problems in getting it done.

The conditions required for a MBO to work are as follows:

  1. First we must have a willing and capable buyer and seller. That is, do you have faith that your management team has what it takes to maintain (and hopefully grow) your business? If yes, then let’s move forward.
  2. Next, it is important to determine the value of your business. To know the value of your company you have to put it up for sale. If you’re selling to management you will need another means to determine fair market value; for example, get a Chartered Business Valuator to prepare a valuation. I suggest you let everyone know early on that you’re not going to sell the business for less than it is worth, but that you will be flexible with the terms.
  3. The buyers have to accept that they are going to put their capital at risk. In other words, they will have to raise some money and give it to you. Note – the MBO deal often falls apart at this stage, but this can be overcome with some creative planning.
  4. Once a fair price is agreed to it is important to consider how the transaction will be financed. MBOs generally require a combination of purchaser equity, senior debt, sub-debt and vendor financing. It is advised that you at least figure out if the financing structure is possible before you get too deep into negotiating terms. It may even be better for the vendor to take the lead to avoid causing embarrassment to management if there isn’t a deal to be had. This could happen if it turned out you are not comfortable with the amount you would need to finance.
  5. Now it is time to negotiate the terms of the sale. This can be interesting, especially if you want to sell, but still want to maintain control. If you’re not ready to pass the torch, then it may be better to put the whole process on hold until you are.

Navigation of a successful MBO process should be a somewhat collaborative exercise led by the business owner. It is our experience that the vendor and management often don’t have the experience or fair negotiating position to get the deal done without using a third-party to facilitate the deal.

MBOs are not easy to do, but if handled properly, they can result in a great outcome for everyone.

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