How can an MBO fit into your succession planning?

A management buy-out (MBO) can be an astute succession planning strategy for business owners looking to step away from the business – whether due to retirement, health or to potentially fund another venture.

Is an MBO right for me?

If you’re a business owner planning to step away from your business, you’ll need a succession plan in place if you want the business to keep trading.

An MBO works well where there is an existing and capable management team within the business that’s willing to take over ownership, rather than trying to find an outside buyer with less familiarity with its goals and operations.

You should approach your management team with the opportunity for consideration well ahead of time, to address any queries or concerns that they may have before officially putting the plan in place.

How does an MBO work?

An MBO transfers ownership of a business from one person (you, the original owner) to another person or entity (the purchasing management team).

It will generally follow the process of:

• A discussion between yourself and the management team to assess the company’s health and future viability
• A new company is incorporated, with the management team all sharing an equal stake (the holding company)
• The company is valued and the purchasers conduct due diligence
• The holding company purchases the shares of the existing company through a combination of initial and ongoing payments
• The company then continues to trade as normal, with the new management team implementing strategies to drive success and growth.

The remaining consideration (unpaid value of the shares) can be paid as a ‘deferred consideration’.

As an example, a company is bought via an MBO, with the value of the shares being sold set at £900,000. The purchasing management team may be able to fund an initial payment of £100,000, with the remaining £800,000 being paid over an agreed period.

If the deferred consideration was payable over a period of ten years, this could be structured as monthly payments of £6,666.

Should the company perform better than expected, the deferred consideration may be paid sooner than initially agreed.

Can I partially exit the business?

You may be able to retain a small stake in your business by keeping a minority of the shares.

Additionally, it is not uncommon for the exiting shareholder to be made a director of the holding company until the sale price is paid in full.

When considering an MBO for your succession strategy, it’s important that you fully consider the implications and begin planning in plenty of time.

Please contact our team to discuss your succession plan and the advantages and challenges of an MBO.