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Management Buy Out (MBO) & Management Buy In (MBI)

Financing Management Buy Out (MBO) and Management Buy In (MBI)

MBI (Management Buy-In) involves an external management team buying into a company to take control, aiming to utilize their expertise for growth.

MBO (Management Buy-Out) occurs when a company's existing management team buys out the majority of shares to take over the business, often to continue its operations with a deep understanding of its workings. MBI brings in new leadership, while MBO keeps the leadership within the company but shifts ownership.

MBO & MBI Strategies

MBI (Management Buy-In) and MBO (Management Buy-Out) are suitable for different types of businesses under varying circumstances:

MBI (Management Buy-In)

  • Underperforming Businesses: Ideal for companies needing a turnaround with fresh leadership.
  • Succession Planning: Suitable for family-owned or SMEs lacking a clear succession path.
  • Special Situations: Fits niche markets or businesses requiring specific external expertise.

MBO (Management Buy-Out)

  • Stable and Mature Businesses: Best for companies with stable cash flows and operations familiar to the existing management.
  • Retirement-led Sales: Works well when an owner seeks retirement, ensuring continuity with a committed team.
  • Spin-offs: Appropriate for non-core divisions of larger corporations, allowing independence with an already in-place management team.

MBI and MBO are chosen based on the business's situation and stakeholder goals rather than industry or size.

The Deal Process

Engagement with incumbent

Existing management need to be on board with any future buy in or out, so that is a good place to start.

Understand funding requirement

If there is a fit, any funding gap will need to be identified & a strategy put in place to fund it.

Set a structure

Once funding is feasible, terms and structure must be negotiated with the incumbent. Upon agreeing to a letter of intent, a period of 6 weeks to 6 months follows to finalise the deal.

Due diligence & legals

Deeply understand the business, get the legals in place and have a robust plan for the other side of the transaction.

Funding in place

Alongside the due diligence, the funding facility will be being set up & you will need this in place and ready to go for completion.

Deal closing & integration beginning

As the deal completes, the corks pop & the fun begins...

Items to Consider & FAQs

Items to consider:
Successful MBO/MBIs require careful planning around funding structure, equity allocation, and security packages. Management teams must demonstrate clear succession plans and the ability to operate independently. Strong financial controls, reporting systems, and governance frameworks need establishing pre-completion. Early engagement with experienced advisors helps optimize outcomes and maximize execution certainty.

What is the strategic rationale for the deal?

Assess management's ability to operate independently, their track record, and growth plans. Consider required working capital changes and debt serviceability under new ownership.

What would failure mean for the existing business?

Review impact on existing facilities, banking relationships, and team stability. Examine downside scenarios' effect on cash flow and covenant compliance.

When do I think about financing a deal?

Start funding discussions early. Structure and risk affect deal pricing, management equity stakes and execution timeline.

What about culture?

Evaluate management cohesion and decision-making dynamics. Consider lender relationship style and support approach post-completion.

How are you reaching a valuation?

Focus on sustainable EBITDA, working capital requirements, and debt capacity. Key metrics include leverage ratios and interest coverage.

Due diligence - how deep should we go?

Prioritise quality of earnings, working capital analysis, and cash flow sustainability. Review customer concentration and sector dynamics impacting serviceability.

What are the costs involved?

Account for arrangement fees, advisory costs, and transaction documentation. Consider management's ability to fund personal equity contributions where required.

Can you give one piece of free advice?

Choose the right management team. More often than not, lenders will get behind the people over a business.

Here to help - Get in touch with our team

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