Is an MBO or MBI a good move for your business?

Advice  |   22 January 2021

Written by
Dr Saverio Salandra, Partner

Is your business ripe for more growth? Do you have the team that can take your business to the next level? Or do you want to take a step back and reap some of the rewards of your efforts? If continuity is important to you, then a management buy-out (MBO) or a management buy-in (MBI) might be an appropriate avenue to consider.

‘The two options are, however, quite distinct from each other,’ explains Dr Saverio Salandra, a corporate and commercial solicitor. ‘An MBO involves the existing management team in the business buying into the business, while an MBI requires an outside business to buy into the business while bringing in its own management team and skillset. Either can be achieved by way of a total buy-out or by acquiring a controlling share.’

Trigger events within your business

Usually, an MBO or an MBI is considered as an appropriate strategy to take a business to the next level if certain situations within the business are triggering the need for a change in management.

For example, the following scenarios could indicate that you and the business may benefit from either an MBO or an MBI:

  • you might have a really strong management team who have the ambition, the requisite entrepreneurial flair, and the financial backing to buy into the company;
  • you may have identified new skills which are critical to the future success of the business;
  • perhaps your existing management team is not performing as it should be and there is stagnation in the growth of the company;
  • your vision and growth strategy for the business requires more financial backing on a level that is typically provided by a private equity firm or hedge fund;
  • you may have been approached by external resources who can bring a fresh new vision and skillset to the business; or
  • you might wish to step away from or reduce your involvement in the management of your business.

Clarifying your personal objectives

It is important to establish how your personal interests align with the long-term strategy of the business in order to decide if an MBO or an MBI make sense. Either option is a significant undertaking and careful consideration needs to be given to which strategy would provide you with the balance of best asset sale price together with long-term net worth growth and stability of your company.

Key questions which you will need to consider include:

  • How important is it for customers and partners to be reassured by having the management remain the same?
  • How much do you wish to remain involved on a day-to-day basis?
  • What level of shareholding do you wish to retain?
  • Could you get a better price and injection of expertise from an MBI rather than an MBO?

What do you need to do to get your business ready?

A successful MBO or MBI needs to be preceded by lots of due diligence, market and corporate valuations and you will need to groom your business ahead of time.

One of the first steps in getting prepared is to understand and establish the value of your business and whether any sale could realise the goals you have in mind. It may transpire that it is better to take value out of the business before any sale and this could include transferring business premises into private ownership, taking additional dividends or bonus payments or boosting pension contributions.

Selecting the right team to take the management and leadership of the business forward is another critical step towards getting ready for an MBO or MBI. This may involve changes to employment contracts and share option schemes.

Whether it is a hedge fund or private equity firm looking to back the deal or a company looking to bring in its own management team, their legal team will be keen to look through and satisfy themselves that your legal documents and policies are in order. So, it is advisable to undertake a review of your terms of business, environmental, health and safety, data protection, equality and other policies and contracts and get them updated.

Ensuring corporate tax affairs are up to date and efficient will also help keep the opportunity attractive to investors in your business. This work should not be limited to just financial reporting requirements but also ensuring tax efficient strategies are utilised and compliant.

An MBO or an MBI may take a long time to fully implement and so it is important that as well as taking the steps in advance, a plan follows to gradually reduce your own role within the business while still reviewing and adjusting it with the help of the professional team you engage.

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