How to Know if Management Buyout is Right for You?

Posted on 30th August 2022

Knowing when and how to sell can be a difficult decision, especially in volatile times for businesses. There are many ways to sell a business, each of which have their own advantages and disadvantages. It may be that your own management team present you with a bid for a buy out – a sale opportunity that could hold unique benefits for both you and your team. But how can you know if such a buy out is right for you?

How a Management Buy Out Work

In essence, a management buy out describes the acquisition of a business through the purchase of its assets, or of a controlling majority of its shares, by a collective formed from the business’s existing management team. The team in question would pool their resources, and collectively form a singular purchasing entity to attain control of the business from its prior owner.

In the vast majority of scenarios, the team in question will assume direct control, using their unique expertise and experience to continue the business in the wake of its prior owner.

Advantages of a Management Buy Out

The advantages for the acquisition team are well-documented, as they can improve their personal financial positions while preserving the business’ operation according to their experience. For the seller, though, there are also key measurable benefits.

For one, sellers with a particular attachment to their business – or a vested interest in the form of minority share-holding – can rest assured that their business will remain functionally intact, in the safe hands of a team that understands its needs.

Confidentiality is maintained, where a public sale would require the release of private information and company processes that could benefit competitors. Sellers can also guarantee a relatively quick sale, depending on the speed at which financing is granted.

Funding

Speaking of funding, one of the downsides to management buy outs relates to the methods by which a buy out team acquires the capital necessary to complete the purchase. There are multiple routes a team can take to facilitate a purchase. They may rely on asset-backed financing, using personal assets as collateral to guarantee a loan.

Alternatively, they may seek investment from an external party in the form of an angel investor; this is a preferable outcome for both parties, as funding is provided immediately, and largely free of condition – guaranteeing a quick sale.

The Right Option for You?

Ultimately, whether a management buy out is the right decision for you and your business is a decision only you, as business owner, can make. The benefits of a management buy out might not appeal to you, especially where there is no personal attachment to the business or industry; public tender may also invite offers above market value. But if you are in search of a quick sale and known quantity in your buyer, a management buy out may be for you. There are other options such as an employee ownership trust, or the standard company buyout.