As my second Insight article on Exit Planning I am going to focus on the Management Buyout – and will refer to it throughout simply as MBO.
A question for you: when is an MBO not an MBO?
Some might argue that handing a family business from one generation to the next is not an MBO.
My response – rubbish!
Whenever the shareholders of a business sell to existing employees in the business whether they are family or not, an MBO is taking place. But it is only fair to acknowledge that a family MBO is different in some respects to a non-family MBO albeit the key issues do remain the same.
Let’s consider an MBO from the ‘buyers’ perspective first.
Clearly the price, the buyout period, and financing arrangements are obvious and important elements to be worked through.
But there are other issues that are also important but may not be given enough consideration and discussion by the buyout team:
- Have the buyers spent enough time together talking through their own individual agenda’s? Do they all have a clear understanding of what each party wants to achieve? Have they defined their own personal future exit strategy?
- Have they achieved a united view of the future strategy and direction for the business, where they want to take it, and how their ambitions will be achieved?
- What about future roles in the business? Have they been able to agree a clear allocation of roles and responsibilities once they own the business? And how will they resolve business differences between themselves?
- Knowledge and skills are an essential element. Between the new team, do they have the leadership and management skills to take the business forward? What training and development can they get to help prepare themselves?
- And lastly, and in many ways most importantly, are they all completely committed to achieving a successful MBO?
In a family MBO all of the above points are every bit as important. The advantage in a typical family MBO is that there is more time available to plan and prepare for the handover to the next generation. Training and development plans can be drawn up to help the next generation develop the leadership and management skills they will need.
Of course, a family MBO may create issues within the family if there are other siblings who are not involved – they may resent what they see as their heritage being passed to a ‘favoured’ sibling. These issues can be difficult to discuss openly. Of course, all might be able to participate through shareholdings even if some have no wish to play an active role in the business – but this may lay the seeds for future discord and disagreement if not done with care and thought.
Lastly, let’s think about the current shareholders. They will expect a Fair Price – but just what does that mean?
If there is more than one shareholder they all need to be onside with the MBO plan. Just as the buyers need to have confidence and trust in the intentions of the sellers, the sellers also need to have faith in the commitment of the buyers and in their ability to complete the deal. The key to this, of course, is to have good, open, and honest communication between all parties.
What could possibly go wrong?
I will answer that question in a future blog!
If you have any questions regarding any of the issues outlined above, please let me know.