Is a management buyout a good way to sell your business?

If you are thinking about selling your business because you want to retire or move on to pastures new, it may be worth considering whether a sale to your existing management team might be an option.

In the first of a two-part series of articles on management buyouts, Robert Goddard, corporate lawyer with Thackray Williams, considers the potential pros and cons of this sort of arrangement from the seller’s perspective.

‘Management buyouts can work well in almost any type of business, provided you have the right management team in place’ says Robert. ‘However, the owner will need to be patient and think creatively to get the deal over the line’,

The advantages of selling to the management team

An established management team will be familiar with how the business works and will have a good understanding of what has contributed to its success, its weaknesses and opportunities for growth.

They will be able to hit the ground running once the sale has taken place, and will be familiar to customers who may be concerned about the future.

The prospect of acquiring the business will provide an added incentive for the management team to work hard and to make decisions in the longer-term interests of the business.

Given that the senior managers will be familiar with the company, there is less need for hand-holding during the sale process and in the weeks and months that follow.

A sale to the existing management team will negate the need to go out and find a buyer from elsewhere, possibly via a professional intermediary who will add to the cost.

Such arrangements also usually provide more flexibility for you in determining how and when you leave the business, either staying on in some capacity to help manage the transition or simply winding down gradually.

Planning ahead

It may be that your current management team does not have some of the skills required to run the business, or even the desire to do so. However, it will be possible to address this if you start planning far enough ahead.

Will I get the best value deal?

Agreeing the sale of your business through a management buyout, as opposed to competitive market bids, can feel unnerving and leave you concerned about whether the price and terms agreed represent a good return on your investment.

While it is true that some management buyouts are agreed for less than what is perceived to be the going market rate, this ignores the fact that the purchase price may have been discounted to take account of uncertain trading conditions or some other circumstance unique to the business and its finances.

Reassurance can be gained by insisting on an independent valuation, which will be used as a starting point for negotiations.

Your solicitor will ensure that your best interests are protected, and it is a good idea to speak to them as soon as you start to think about selling your business.

Financing the deal

Depending on their backgrounds, it may take the management team longer to raise the finance they need to fund the purchase price.

On the other hand, in some cases, finance may be easier to arrange, particularly where lenders view forecasts for profits and growth given by a management team in situ as being more reliable than those given by an external buyer.

Depending on whether you want any continuing involvement, it is also possible to be creative in how a deal might be structured, including over a period of time. Your solicitor will advise you on the best deal structure for your business.

For help with a management buyout, or any other corporate transaction, please contact Robert.