What is a management buy-out (MBO)?

If you are thinking of transferring your business, have you considered a management buy-out, i.e. selling your company to the management team? How does it work? What are the advantages and risks associated with this type of deal? myLIFE has the answers.

What is a management buy-out?

A management buy-out or MBO refers to the sale of a company to one or more members of the management team, who take over all or a part of the shares of the former owner and become the majority shareholders of the business.

An MBO makes sense in many situations, in particular, if an entrepreneur is looking to retire or if there is no natural successor within a family business. It’s also an option when a major shareholder decides to step back from the company, or a parent company is intending to dispose of one of its subsidiaries.

Useful info: when the company is taken over by people outside of the company, we call this a management buy-in.

Why choose an MBO and what are its advantages?

It’s reassuring for an owner to hand over to a team they know well. They know the characters and operational values of those taking over the business and can discuss the direction in which they wish to take the company with confidence.

The buyers are already “part of the family”. They have a good understanding of the company and how it runs. They already know its strengths and weaknesses, which makes the negotiations easier, as well as all the reviews (accounting, legal, tax, strategic, environmental, etc.) that are necessary to close the deal.

Confidential information regarding the business strategy, technologies used and methods applied are not disclosed to anyone outside the company.

In addition, internal procedures and the products and services offered by the company are well known. Business continuity at the company is guaranteed thanks to the experience and know-how of the teams.

The handover is easier for the company’s employees, suppliers and clients. In principle, the transition should be easier to accept and less worrying than a sale to an unknown entity.

Ultimately, confidential information regarding the business strategy, technologies used and methods applied are not disclosed to anyone outside the company.

Things to look out for with an MBO

The owner must ensure that the employees who are taking over the reins of the business have the necessary skills to properly manage the company (entrepreneurial spirit, ability to take decisions, etc.) and/or set up a mentorship scheme where necessary.

For their part, the new owners must manage their change of status with the employees and other managers (who are not involved in the takeover). Any misunderstanding could result in tension. This is a sensitive issue and managing it properly requires a great deal of tact.

In contrast to a sale to an external third party who will take a fresh look at how the company operates, a takeover by insiders may result in the status quo being maintained, rather than providing the opportunity to make significant improvements to the business.

The management team rarely has the necessary resources to finance the full acquisition price.

Care should also be taken with the discussions between the vendor and the managers – the existing hierarchy may destabilise negotiations or result in conflict. In contrast, too much trust between the two parties may result in a lack of objectivity on both sides.

Ultimately, the management team rarely has the necessary resources to finance the full acquisition price. It will therefore need to look for financing solutions to top up its own equity contributions and this risks having an impact on the company’s liquidity if debt is required.

An MBO requires upfront planning

Owners clearly save time as they don’t need to look outside of the company for a potential buyer but it’s still important to plan the transfer properly in advance to avoid endangering the success of the project. As with a purchase by external buyers, an MBO can take several years: between 2 and 5 years depending on the circumstances.

The sale must be prepared in minute detail, as should the choice of the ideal in-house heir. Even if the vendor and buyers trust each other, there are several key steps that must be followed: definition of the terms of the transfer (sale of the business assets, shares or certain assets), analysis and valuation of the company, consideration of financing solutions, negotiations between the two sides, preparation of legal documentation, transfer of power, mentoring, etc.

Subsidies are available for the takeover of a company in Luxembourg. These may take the form of capital, interest rebates, loans and guarantees.

An MBO can involve complex financing

Taking over a company requires the investment of substantial funds. Managers will generally need several sources of financing for the takeover of the company.

• • Capital: personal contributions underline the buyers’ commitment to the takeover.
  • Bank debt: will only cover part of the purchase price of the company and will, in principle, be a top-up for other forms of financing. If the request is approved, the bank will demand a capital contribution and guarantees.
  • Investors: private investors or investment funds may contribute capital in exchange for a stake in the company.
  • Subordinated debt: this is a halfway house between equity capital and loan capital, and includes, for example, mezzanine financing.
  • Vendor loans: the buyers only pay part of the transfer price to the vendor who grants them a loan with the balance being repaid in instalments.
  • etc.

To convince investors, banks and other financial partners, the managers must prepare a sound and transparent business plan to illustrate the profitability of the takeover and the growth opportunities.

Useful info: subsidies are available for the takeover of a company in Luxembourg. These may take the form of capital, interest rebates (from the Ministry of the Economy), loans via the Société Nationale de Credit et d’Investissement (SNCI), or guarantees issued under the system of the Mutualité de Cautionnement.

One last piece of advice: to get the best out of an MBO, it’s essential to properly structure the deal financing and to seek the support of experts at key stages in the process. A successful transaction will benefit from the input of a banker, lawyer, notary, tax specialist or specialised takeover consultants. Good luck!