Is Management Buyout a Good Exit Strategy? | Hilton Smythe

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Is Management Buyout a Good Exit Strategy?

Management buyouts are a popular exit strategy in the UK. Investment firms will often target underperforming or undervalued companies and perform this type of buyout with the intention of making a hefty profit.

Exit strategies are an integral part of an entrepreneur’s overall business strategy. Planning a proper exit is best to keep your business running and ensure that you can extract maximum financial value from your exit.

Despite this, 48% of entrepreneurs looking to exit their businesses have yet to plan how to do so. Chaotic exits only hurt yourself and the business you’re departing, which is where business exit strategy consulting comes in.

So, what is a business exit consultant, and how can they help?

Management buyouts are a popular exit strategy in the UK. Investment firms will often target underperforming or undervalued companies and perform this type of buyout with the intention of making a hefty profit.

Currently, the industry is at its lowest activity since 2009, with just 59 private equity deals taking place between January and June 2023. There are, however, still opportunities available. The only question is, does this make sense as an exit strategy?

Management buyouts involve purchasing all or a part of a company from the current owner – more than 50% of the outstanding shares must be purchased as part of any deal to count as a buyout. Following a buyout, the current management team remain in place, but this time as owners.

With 2022 being such a challenging year for the UK’s 5.5 million small businesses, the MBO may become a more attractive exit strategy as big players search for bargains.

However, this will rely on financing availability. In nearly all MBOs, external financing is required to help with the purchase. Once an MBO has been greenlit, the new owners take control of the business, and the previous owners typically depart.

MBOs are an excellent alternative to other forms of exit, such as mergers, selling, liquidation, or transferring the business to a third party. It also leaves the company in safe hands instead of approaching another buyer.

MBOs are often viewed as a speedier way of offloading a business when owners wish to retire or move on to other ventures. It also saves the headache of approaching industry competitors and risking disclosing sensitive information.

However, the most common reasons for MBOs are:

·  The current owners want to exit the business.

·  A parent company wants to divest itself.

·  The company is already in distress but has potential.

·  The existing management team sees a brighter future under new ownership.

By putting the business into the hands of a new management team, it can make sense for the current owners and the new ones. In many cases, the new management team will already possess industry experience and see an MBO as a less risky alternative than a startup.

For example, IHS Markit divested itself from its military intelligence company Jane’s by selling it to Montagu Private Equity LLP for $470 million. Jane’s now operates as a standalone business with the same CEO and senior leadership team in place.Another example is the apprenticeship training company Instep, based in Cheshire. The company completed a management buyout that saw CEO Andy Murphy and Leanne Gagic, its corporate services director, acquire equity in the business.

From an owner’s perspective, an MBO can make sense at a particular time for several reasons.

If you wish to retire, the right time is whenever you want to leave. It can also make sense if you’re tired of your current position and want to move into something else. Sometimes, you may even have a different vision than your current management team.

It can also make sense for a management team with a different viewpoint from the current owner. Firstly, the management team already understands the business and how it works. This represents less risk for them and the new owners.

Again, if they have contrasting views to the previous owners, it makes sense for both sides to diverge in this way.

Ultimately, the right time is when you believe it’s best for the business and yourself.

In the vast majority of cases, external financing will be required to conduct a successful MBO. The type of model used depends, but the most common type is a straight equity investment.


The investor will finance the management team to buy out the majority shareholder. In return, the investor receives equity in the company.

However, an investor may also opt for a mixture of debt and equity. The investor may take a small amount of equity, with the rest of the financing provided as a loan that the business must repay later.

In short, the correct funding method primarily depends on the plans for the business and what the investor wants to gain.

Management buyouts provide several advantages to buyers and sellers, which are not guaranteed via a conventional trade sale. These advantages include:

Smooth Transition – By far the most significant benefit of this exit strategy, an MBO guarantees a smooth transition from one owner to the next because the new owners already have close connections with the company, meaning minimal disruption.

Protect Information – During a trade sale, the due diligence process means releasing sensitive and proprietary information. By divulging this information, you could put your company at risk if the sale falls through. With an MBO, this isn’t necessary.

Faster Transactions – The MBO team knows most of the company’s secrets. They already know how it operates and the various numbers involved. Although due diligence remains necessary, it’s usually considerably faster.

Good Home – The owner gets to leave the company knowing that their legacy is assured. With a trade sale, there are no guarantees on the company’s future, but with an MBO, the owner is already familiar and confident with the new owners.

As with all exit strategies, MBOs have downsides to consider before pursuing this option. These disadvantages include:

Reliance – Your company’s future success relies entirely on the current management. If an MBO occurs from a position of weakness, many may question whether an MBO can turn the company around. This could represent a continued decline going forward.

Management Weakness – From an investor’s perspective, an MBO may appear to be the wrong move because of the influence of the outgoing owner. If it’s believed that a company would be losing too much through the departure of an owner, they may view an MBO as a poor alternative to drive the company into the future.

Inexperience – Moving from a management role into an ownership one can create its own challenges. A good manager isn’t necessarily a good owner. With an MBO, this may lead to negative growth for the business.

Liquidity – Typically, management taking over will be required to put their capital into the MBO before an owner will invest. This can create problems for managers if they lack liquidity. Sometimes, it can result in managers giving up part of their pension pots or even leveraging their personal assets.

MBOs come with similar business risks as ordinary trade sales. Although you know the management team and they have an intimate knowledge of the company’s inner workings, this doesn’t mean they have the skills or know-how to act in the ultimate leadership role.

For example, if a company is failing, it could be failing because of the decisions of the existing management team. Opting for an MBO may just highlight and magnify those problems, thus hastening the company’s decline.

Likewise, if a management team has differing visions from the current owner, employing those visions may turn out to be the wrong move.

Furthermore, there are issues with the investment. An investor may decide to oust the new management team if growth targets aren’t achieved. Alternatively, if growth goes negative, the new management team may be unable to meet their loan repayments, which puts the company at risk.MBOs have risks and pros and cons, but they are a viable exit strategy in the right situation. At Hilton Smythe, we support managing directors in weighing up the pros and cons of various exit strategies. To learn more about some of our business exit services, speak to our team now.

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