Management Buy Outs – Myths and Misconceptions

Management buyouts, or ‘MBO’s, are a form of business sale that sees an existing executive team within a company purchase that company directly. This is often done when management teams feel at home within a company, and do not want to risk its sale to a business owner that may not have the best interests of the business at heart.

But MBOs have a bad reputation, largely due to common myths and misconceptions that mischaracterise the qualities of such a transaction. Here, we will look at three of the biggest myths, and why they are false. 

1. Management Teams Will Struggle to Raise Funds

This is perhaps the most common – and indeed, the most pernicious – of myths relating to a management buy out. The reasons given for this misconception are that salaried executives are less likely to have the private assets, even collectively, to fund a complete buy-out.

This may be true in a majority of cases, but does not affect the outcome – and funding is always available, contingent not on the management team but instead on the business’s financial standing. Management buy outs are often made possible via lending solutions, from bank loans to external venture capitalist investment. 

These avenues of financing are often predicated on metrics relating to the business’ current standing; if cashflow is positive, growth is looking healthy and the management buy out team’s business plan is robust, funding the purchase would be no issue whatsoever.

2. Selling to a Trade Buyer Guarantees a Better Price than an MBO

Another common myth that surrounds the sale of a business is that your choice of the buyer can significantly influence the price you sell at; specifically, that selling to a management buy out team means selling for a lower price than selling to an established trade buyer.

While there are certainly a number of examples that seem to prove this point, there is no hard and fast rule that makes this an inevitability. Sometimes a business sale can benefit from public tender owing to competition between buyers, but management buyouts can take place privately – with the added advantage that proprietary information is kept proprietary. 

Some teams may pay the asking price for the business, while others may haggle down. If there is any reduction in sale price in comparison to a trade sale, consider it a tax for a more convenient form of sale.

3. Selling Via MBOs Means Walking Away from the Business Entirely

Contrary to what some may believe, selling a business to a management team does not require you to sell 100% of your business, and relinquish control. Quite the opposite; many business owners like to stay on as shareholders or consultants, to ensure the smooth hand-over and continued running of their business.

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