Our valuation experts explain what company directors must know about the value of accurate, independent business valuations for steering their MBO deals toward success.
Selling your business can happen on the open market, but one of the best ways to secure your legacy and leave your firm in good hands is to opt for the Management Buyout (MBO) model. An MBO hands control to your company’s existing management team, allowing for a seamless transition into your brand’s next era.
Currently, the UK is going through something of a deal boom, with deal values in H1 2024 increasing by 66% to a value of £68 billion. We exist in a market of opportunity, but like any good opportunity, accurate deal valuations are crucial to any successful MBO.
Here’s what company directors must know about the value of accurate, independent business valuations for steering their MBO deals toward success.
Understanding management buyouts
Management buyouts occur when a company’s existing owners sell their stake in the business to its current management team. Rather than selling assets, they sell stakes. Outgoing owners may choose an MBO as an alternative to the open market to avoid issues like:
Another advantage is that the management team already understands the business and its operations, empowering them to reduce risks and seamlessly transition from one ownership team to the next.
It’s also an issue that the current government is actively focusing on, with an estimated 17,000 UK businesses identified as well-suited for an MBO, representing a total tax take of £407 billion from 2024 until 2040.
How management buyout valuations work
Valuations in a management buyout scenario are similar to other types of business sales. The same models and methodologies come into play in determining the value of your business. However, there’s a need to strike a balance that may not factor into an ordinary trade sale.
For example, an entrepreneur looking to sell a tech startup and move on to their next venture may prioritise extracting as much financial value from the sale as possible. In the case of an MBO, this is often secondary to ensuring the outgoing owner’s legacy and providing their management team with the greatest chance of growing the business further.
Like all business transactions, independent valuations are crucial for arriving at an accurate and fair valuation. Multiple methodologies may be employed, including:
MBOs often include an element of “goodwill”, an intangible asset in accounting terms. In this context, it’s the difference between the purchase price and the fair market value. It incorporates issues like brand recognition and intellectual property. Often, outgoing owners may actually let the business go for less than its fair market value, whereas in a trade sale, it may result in a buyer paying more.
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How business valuations help in management buyouts
The mood of negotiations in MBOs differs from those where a competitor is attempting to take you over. Both parties are familiar with each other and want what’s best for the company's future while providing fair compensation for each side.
Independent business valuations support MBOs by bringing in an objective party to analyse the company and provide a baseline for negotiations that each side is satisfied with.
So, how does commissioning a business valuation support these deals?
Assess a fair price
Valuations are objective assessments of what the company is worth. It removes bias and factors in everything from:
With this information, the management team and the owner can negotiate a fair price. It prevents overpaying during the deal and ensures the outgoing owner is appropriately compensated.
Arranging financing
Realistic valuations support the management team’s effort to secure financing for their buyout. Whether they’re approaching traditional lenders or seeking private investment, a valuation report provides confidence for these third parties that this is the deal for them.
Insights into the company
Any MBO must be right for the existing management team as they prepare to take the reins of business ownership. Valuation reports explore the company’s strengths and weaknesses, allowing them to determine which areas they must focus on as part of their succession plans.
Streamline the negotiation process
Even amongst known parties, negotiations can quickly get emotional and come to a grinding halt. Business valuation reports provide data-backed arguments to drive negotiations forward and prevent emotions from derailing the deal entirely.
Allocating equity
Many MBOs involve disproportionate equity because many management teams lack the capital to purchase the business fully. Accurate valuations support management teams as they determine how much equity each member is entitled to, providing fairness and preventing disputes later down the line.
Set appropriate performance targets
MBOs often give companies the best chance of success after the original owner departs, but that doesn’t mean all deals of this type are guaranteed to succeed.
Business valuation reports get underneath the skin of companies and unveil issues that may impact a company’s prospects. It’s a crucial document for determining risks and areas of improvement, which forms the baseline for setting future performance targets.
Crucially, these reports set the stage for realising the value of the firm after the buyout has been confirmed and the management team takes over.
Tax planning
All business transactions come with significant tax implications. Selling owners and the incoming management team must consider how the MBO will impact their tax affairs. A proper valuation report allows both sides to weigh up the tax consequences of going through with the deal and how they can structure it to reduce their liabilities.
As you can see, valuation reports are the foundation of successful MBO deals. However, commissioning a report often means jumping into what’s often an unfamiliar market of valuation agents. At Hilton Smythe, our team of business consultants can leverage their experience to point you in the right direction.