How to execute a successful management buy-out

Katharine Byrne, Partner, BDO Corporate Finance, featured in The Irish Times special report on Mergers and Acquisitions. Read Katharine's extract below. 

For many business owners looking to exit, finding a member of the next generation willing, or able, to take over may not be an option. The solution may be in the office next door.

There are risks such as the prospect of a failed MBO, after which a disenchanted top team jumps ship or, worse still, stays on.

“For the MBO team coming in it is generally their first transaction. If the seller is the business founder, very often it is his or her first sale too, so everybody is really nervous,” says Katharine Byrne, head of the BDO Corporate Finance Team.

The good news is that because the stakes are so high if it goes wrong, “once they go down the MBO route both sides tend to be very much wedded to the process”, says Byrne.

The best way to ensure good relations is to be open and transparent from the outset. Then work towards a “win/win”’ for both sides.

“The MBO team will want to buy the business at the best possible price so that they can make some money when it comes time for them to exit in a few years’ time. If it is a corporate seller, what they might want most is a nice smooth process. If it is a founder that is selling, there will be legacy issues involved. They will typically want the business to continue to grow, and so will be a lot more supportive of the MBO,” says Byrne.


Top Team

Some 95 per cent of Irish businesses are small and medium sized enterprises, many of which are owned by their founder. Grooming a top team capable, and willing, to step into the owner’s shoes takes many years, a good recruiting and personnel development policy and a willingness to delegate, something which can be difficult for founders.

Ensuring the business is not too closely attached to the owner in the mind of its customers is important too.

“The prep time for the MBO team can take longer, but the transaction can be quicker,” says Byrne.

The fact that the management team knows the business’s weaknesses will also give them some leverage in negotiations, however – they know its weaknesses – so the best strategy for the seller is to address such issues head on.

Just make sure the management team has its funding in place before fully engaging with it. “It seems unfair, but it suits the management team too, because it gives them time to get their funding organised,” says Byrne.

Historically MBO teams relied on debt from banks or specialist lenders to finance the transaction. The global financial crisis provided a painful lesson on the risks inherent in highly leveraging a growing business, “if something happens”, says Byrne.

It is, she says, important to capitalise the deal correctly by assessing what level of appropriate and sustainable debt the business can afford.

Next establish what the funding gap is and how best to fill it, whether via friends and family, the Employment Incentive Investment Scheme (successor to the old Business Expansion Scheme) or via another joint venture partner.

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