Taking the MBO option

Katharine Byrne, Head of the BDO Corporate Finance team and a member of the BDO International M&A Group recently featured in The Irish Times Special Report on Mergers & Acquisitions.

Is selling your business to your management team the best option? Yes for speed, cost and flexibility but not for valuations – and both sides need to watch for pitfalls.

There has been a notable increase in management buyout (MBO) activity in recent years as more equity funds enter the market looking to back ambitious management teams, says Katharine Byrne.

A distinctive factor in the Irish market has been the number of founders seeking to sell up. Katharine Byrne adds: “Some had already weathered the storm of the last recession and the hit of both Covid and the Ukraine crisis has made them realise the importance of crystallising value for part or all of their equity.”

Many do not want to sell to trade players and are keen to see their business continue and grow. “This is where the MBO becomes a solution that not only secures the future of the business but provides a clear exit plan for the shareholders and incentivises the management team with equity in the company,” she adds.

The value of a trading business is generally determined by cash flow, market opportunity and strength of its management team.

For many vendors the advantages of an MBO is certainty and speed of transaction as a result of limited due diligence – if any – and very limited warranties, as well as the ability to retain more control of the process.

“A sale to existing management is particularly attractive if the vendors have a limited number of trade buyers or are concerned about the impact to the business or commercial sensitivity of approaching competitors,” says Katharine Byrne.

“Of course, the biggest risk of approaching management about a potential buyout is their reluctance to pay market value, especially if they believe that the goodwill of the company has been or is dependent upon their continued involvement.” - she adds.

Content adapted from The Irish Times.