The sale of your business
You often only get one chance to do it right. There are various ways to sell your business, but who will be the best new owner? Are you considering family members, a financial buyer, or perhaps a strategic party? In some cases, a management buy-in — where an external manager takes over the company — can be attractive. But what if the ideal successor is already inside the business?
Management Buy-Out
Then there is the so-called management buy-out (MBO), says Menno Stuker, partner at Rembrandt M&A. "In this case, the existing management — or one or more talented key figures within the organization — acquires the shares from the entrepreneur. The goal is a smooth transition, preservation of the company culture, and a market-based price."
A sense of trust
For some companies, there may be somewhat less interest from the market — for whatever reason. In such cases, a management buy-out can be an attractive option, according to Menno. "A major advantage is that you can fairly accurately assess whether the buyer — someone from the management team — has the right knowledge, experience, and qualities to lead the company into the future. But even for companies that are well-positioned in the market, it’s reassuring to know from the outset who you are selling your business to."
Another benefit is that the existing organization is likely to remain stable during a management buy-out. If you choose an MBO, there’s a significantly higher chance that things will stay the same for employees, customers, and suppliers. And the business you’ve built — along with its culture — is more likely to remain intact. For many entrepreneurs, that’s an important and comforting thought. A financial or strategic buyer is more likely to want to leave their own mark.
A shorter sales process
This often results in a much shorter sales process. After all, the buyer already knows the business well, and external parties don't need to be heavily involved. Contract negotiations and due diligence typically take less time. In other words: a relatively high success rate within a relatively short sales process.
Loyal employees
Many entrepreneurs who opt for an MBO are eager to give loyal employees a chance, Menno notes. “A great example is a transaction we facilitated earlier this year. The current business owner — who had once acquired the company himself after being an employee — was thrilled to now offer that same opportunity to his key people. And that was despite the fact that the company could have easily been sold to a strategic party instead.”
Financial structures
Financing the purchase price is naturally a major consideration for entrepreneurs exploring an MBO. Many selling owners assume that a private individual won’t be able to fund the deal. That’s why it’s important to know that there are plenty of financial structures available to make an MBO feasible — with or without the involvement of the seller.
As a seller, you might choose to finance part of the purchase price via a subordinated loan, possibly combined with retaining a minority shareholding. This often depends on the role the seller intends to play after the transaction. Does the owner-director (DGA) wish to stay involved for a while in a different capacity and transfer the business in phases? Or is the goal to transfer ownership entirely and reduce involvement as soon as possible?
Managing expectations
It’s also important to be aware that an MBO process carries some risk, Menno emphasizes. “It’s possible that buyer and seller may ultimately not reach an agreement. If expectations aren’t well managed and the process isn’t carefully structured, you run the risk of not only failing to sell your business, but also damaging the relationship with your management team. Fortunately, this doesn’t happen often in practice — but it’s something to be mindful of.”
A smooth process
To maximize the chances of success, it’s crucial to carefully plan the process in advance. How will you communicate the buy-out to staff? Who will be involved, in what capacity, and on what timeline? Are there any spouses or business partners on the management side who need to co-sign for the acquisition? That’s why it’s essential to establish clear agreements about the process from the outset.
Successful outcome
Proper Expectation Management and Clear Agreements Are Essential, Menno emphasizes. “Precisely because both parties know each other well, it’s wise to involve an external advisor to guide the process. A (joint) neutral advisor can provide support within clearly defined parameters, significantly increasing the chances of a successful management buy-out for all parties involved.”
Interested in Exploring a Management Buy-Out?
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