Things to Consider When Going Through a Management Buyout

Management buyouts are not the most common routes to the sale of a business, but in certain key industries or situations a talented and invested management team may express interest in purchasing the business for which they work. These arrangements can often work out well for buyer and seller alike, but are complicated for a reason; here are three considerations vital to any preliminary discussion about a management buyout.

Establishing Business Readiness

The first major consideration for either party to make ahead of a potential management buyout involves the current standing of the business in question; is it in a condition to be sold? The management team in line to make the purchase will want to understand everything they can about the company’s standing and current profitability, in order to make informed decisions regarding how to proceed – or if to proceed at all. This might be achieved by seeking professional management buyout advice from a chartered accountancy firm, which can also carry out crucial valuations and financial audits to discern the financial health of the business, as well as any potential concerns with regard to reporting. It is in the seller’s best interest to have the business’ readiness for sale established, to guarantee a swift and efficient sale and to maximise outcomes.

Evaluating the Risks

There are risks inherent to any management buyout, beyond the intrinsic situation and health of the business at its core. Evaluating these risks is another crucial element to the preliminary process, from the readiness of the management buyout team themselves to the wider landscape in which the sale is taking place. Does the buyout team have the requisite knowledge and experience to transition from executive management to business leadership, and will their change management retain the confidence of investors? From the buyer’s perspective, are there any ulterior motives for the sale of the business in question, and could they negatively impact the business after the transaction? Maybe the seller is privy to industry news which could spell danger for the business. Due diligence on both sides is key to mutual trust, and to ensuring the transaction is carried out in the best of faith.

Financial Considerations

The last major consideration to make before beginning formal proceedings relates to the financial details of any buyout. Generally speaking, management buyout teams will form an external vehicle for acquisition, a separate organisation to carry out the transaction as a singular entity. The transaction, carried out via this entity, will likely need financing – whether via a bank loan, external investment or a debt agreement with the seller. As a buyout team, are you financially liquid enough to guarantee the purchase, and will any financing efforts be robust? As the seller, are you in a position to risk assets to a debt agreement, or can you be assured that the finances will be there to complete the transaction?

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