The Pros and Cons of a Business Sale Via a Management Buyout

If you are thinking of selling your businesses, then one of the most common ways of doing so is by a management buyout.

Virtually every professional service business deals with succession planning in that way so we are all used to the idea of having bought into our businesses under such arrangements.

However these deals are not second nature outside professional life, so here are some of the arguments for and against disposal by way of an MBO.

Seeking an external buyer

The Advantages:

1.  Negotiation without hard feelings.
   If you are talking to an external buyer and the deal isn’t right then pulling out should have no perceptible effect on your business. You have a free hand to drive the best deal.
2. A buyer in the same trade will have synergies – these will drive the sale and add to potential  liquidity of the buyer. Whilst most buyers argue that the synergies should not be reflected in the sale price they give room for manoeuvre.
3. The likely availability of capital. Most external purchasers (certainly those derived from proper market research) will have available capital and one of the very early questions of your professional team will seek assurances in that regard.
4. The best price for a business is usually achieved when there is competition amongst buyers. When selecting potential buyers in a structured process more than one potential buyer is likely to be located.
5. The potential sale may not remain confidential.

The Disadvantages:

1. The costs of marketing
   To generate interest in your business with a view to obtaining the bestselling price requires skill, experience and time and it doesn’t come cheap. In fact the costs of finding a buyer is usually more than the legal costs of executing a sale.
2. Divulging sensitive information before the sale even with an NDA
   An external buyer will know little of your business. It follows that most external sales  precede an extensive due diligence process. Any buyer will have to sign an NDA but it’s never comfortable giving detailed information to a potential competitor.​
3. The potential reaction of customers to a change of control
   Many commercial contracts now contain change of control clauses allowing termination in case of a change of control. Customer reaction is a factor to take into account on an external sale.
4. The contractual burden giving warranties and disclosure.
   An external buyer will seek extensive legal assurances as to the state of your business. Great care must be taken when giving these assurances as any claims are likely to be capped at the total sale price. Essentially everything will be on the line.
5. Time implications
   Finding an external buyer is not only costly in terms of fees – it can also be an extremely lengthy process. Done correctly an agent will need to work closely with a Seller to put together the sort of sales information buyers would expect. There is then a long process of finding a buyer and of course, negotiating deal terms. Even after heads of agreement are signed and the legal process begins, sellers are often surprised by how much of their time is taken up in dealing with pre-sale formalities such as due diligence and disclosure. Sellers often find it stressful juggling this with actually running the business and ensuring profits don’t fall as a result.

The Advantages of an MBO

The Advantages:

1. MBO’s don’t require the same significant external marketing as would be required with an external buyer. Therefore selling to a management team tends to be quicker and cheaper.
2. The contracts are much simpler and because the management should be taken to know the businesses there should be minimal due diligence required. In addition, the warranties given in an MBO are far less onerous. This means that on completion the seller is left in a position where he is less likely to be burdened with the legacy of the promises they have made about the business pre-sale.
3. In a management buyout situation, it should be easy to maintain confidentiality and customers and employees are unlikely to be concerned.
4. Companies purchased through an MBO tend to have a high success rate. Generally, the management team have the requisite experience and skills within the specific industry, as well as having key relationships with employees, customers and suppliers. This is likely to advantage a Seller since it is almost always the case that the sale price will include an element of deferred consideration or earn out. The higher the chances that the company will continue to thrive post-acquisition, the higher the chances that a Seller will be able to realise the full consideration agreed for the sale.

The Disadvantages:-​

1. The management are likely to be much less experienced in buying a business and much less well capitalised. There will be no synergy savings. This could have a downward pressure on price.
2. Once negotiations commence with a buy out team, if the deal does not proceed to completion it can be difficult to go back to “business as usual”.
3. Buyers and Sellers will need to think carefully about how a Seller will exit the business after sale. It is often tricky to negotiate the terms relating to any hand over period as the parties will need to strike a balance between possibly retaining the expertise of an outgoing Seller with ultimately being able to have full control over the business. If a Seller retains an equity stake whilst deferred consideration is outstanding, a Shareholders Agreement will be required to govern the relationship between the parties during any interim period.

MBO’s are most common when it is hard to find an external buyer and/or where a number of managers are key to the company’s success. But there is no one deal structure that suits every business.

ORJ prides itself in helping business owners put together the deal that works best for them, identifying what is important to a Seller. Often this is realising the best price, but often it involves weighing up several key factors that are behind a decision to sell.

For more information on how ORJ Solicitors have helped business owners navigate a buy out, or if you would like to talk to someone about management buy outs, please contact Lorraine Smith or Patrick Tedstone on 01785 223 440 or email lorraine.smith@orj.co.uk