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How to begin a management buyout

Reading time: 2 mins 48 secs

First4Lawyers, July 09, 2018

A management buyout (MBO) is when the managing team buys the company they are in charge of.

This can mean purchasing the full business, or the sub-branches of the business that aren’t directly in line with the main company.

MBOs can be complicated financially, strategically and emotionally. It's important you put in place professional legal advice when looking to start a management buyout – whether you’re one of the managers or an owner looking to sell.

There are many steps and sub-tasks involved in a management buyout, but the main process is as follows:

  1. Establish a team
  2. Approach the business owner
  3. Contact a corporate and commercial solicitor
  4. Put together a business plan
  5. Approach lenders
  6. Perform due diligence

Starting the management buyout process

The very early stages of a management buyout should begin with simple but sensitive conversations. The prospective team needs to be established first. Then the team can approach the vendor through a ‘sounding out’ process.

This should explain the team’s interest in a buyout and work out if the seller would consider it. If they would, the team can start working out the business’ value, as well as their planned to the pitch for purchase.

At this point it’s recommended the team hire an advisor or solicitor who can help them work out the value of the business and to hash out everyone’s responsibilities of each party if the buyout happens.

What happens next?

If the management team is a contender for the business, they might need to pitch like any other prospective buyer.

This involves making a business plan, which should cover the team’s proposal for the future of the business, the understanding of the business, and how the team will make any changes.

Funding is another crucial step – and the business plan will be needed here, too. This can be negotiated with any bank or lender who lends for business purposes.

Finally, due diligence must be done. This involves ensuring every part of the business is in order. A lender might not finalise a loan without due diligence in place.

If these steps are successful, the main things are in place for the buyout to be completed.

Is a management buyout right for you?

Whether you’re thinking about being part of a management buyout or you’ve been approached about one for your business, it’s important to consider the benefits and drawbacks.

The central benefit of having the management team buy out the company is they should already have a solid understanding of the business and how it works. But, some managers could struggle as owners. The role needs a drastically different work style.

For the selling owner, being bought out by the existing team can be more straightforward, but the management team may present the business as being worth less than it is to deter other potential buyers.

Want help with a management buyout?

The above is a simple look at a management buyout, but the reality can be more tricky. It’s always recommended you approach an experienced solicitor to represent the team’s best interests when looking to buy out a company.

Get in touch with us to discuss your requirements and we'll match you with a relevant corporate and commercial law expert. 

Or read more about our corporate and commercial law services

 

Note: First4Lawyers offers this information as guidance, not advice. Before taking any action, you should seek professional assistance tailored to your personal circumstances.

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