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The ups & downs of MBOs

29th Mar 2011
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With such a restricted market for mergers & acquisitions in the present climate, MBOs are becoming more popular, and often are the only route to exit for many businesses. But firstly, let’s demystify (and laugh at) the various acronyms you may hear:

MBO – a management buy-out is where the employee/s purchase the shares of the company they work for

MBI – a management buy-in is where an outside individual (rather than a business) buys the shares

BIMBO – you guessed it, it’s where there’s a team consisting of both employees & outside individuals

VIMBO – ‘vendor initiated MBO’ generally means that the owner/vendor is financially backing the acquisition of his company buy his employees by agreeing extended deferred payment terms

What’s so great about MBOs?

  1. The employees already know lots of elements of the business – staff, customers, suppliers, products etc so the handover period should be smooth;
  2. There will be little change in the business model (apart from ownership), which means the banks should be slightly happier to support it;
  3. There is generally a less adversarial attitude to negotiations, with everyone wanting the deal to work at a fair price;
  4. There should be lower deal costs (from professionals etc) as there’s little marketing required to find a buyer and the scope of due diligence is probably narrower than an external purchaser would require.

What’s tricky about MBOs?

  1. The new management team may not have respect of other employees in their new position, may lack key skills in managing the business going forward & may want to implement rapid change to ‘make their mark’;
  2. Funds may not be readily available by purchasers, so a lower value may be accepted and/or it is likely that deferred terms will have to be accepted by vendor;
  3. The MBO team will require access to confidential information for their due diligence, and if deal aborts there may be concerns about risk of future breaches;
  4. It can be difficult for an MBO team to negotiate with their employer at arms’ length whilst continuing to work for them, including possible conflicts of interest and if the deal aborts, the business may lose a key employee

Recognising that this is such an amazing but probably scary opportunity for management teams, The Corporate Finance Network devised an MBO Training Programme for potential MBO Teams, which hopefully means more MBOs will complete successfully.

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