Management-Buy-out
Management buy-out: A strong option for entrepreneurial succession
The question of whether the departure of the long-time "boss" will lead to uncertainty among staff, customers and suppliers and whether business secrets are at risk in the event of a sale is one of the main concerns in the context of a business succession.
A management buy-out ( "MBO" ), if properly implemented, can be a powerful tool to address these problems.
MBOs are a versatile and flexible structuring option for entrepreneurial succession.
Continuity in management
The takeover of the company by its own managers ensures continuity in the management.
From the point of view of the employees, customers and suppliers, nothing changes as a result of the MBO. On the contrary, the familiar and proven leaders continue to manage the company. Radical upheavals in the corporate culture, strategy and market presence are thus unlikely.
As a result, uncertainties that can arise from a change of shareholder are reduced to a minimum.
Protection of trade secrets
The disclosure of partly critical information cannot be avoided in a company sale.
Even if one tries to limit the misuse and disclosure of company information as best as possible by selecting the interlocutors and concluding suitable confidentiality agreements, there is always a residual risk of misuse despite all caution.
This risk is highest when addressing direct competitors, whereas it is rather low in the case of an MBO.
MBO & Shareholders
For many entrepreneurs, the sale of their own company is not only an economic issue, but often also an emotional challenge. If a succession within the family is not possible or not wanted, then almost only an external solution remains.
For the selling entrepreneur it is often easier to hand over his life's work to trusted persons than to third parties or competitors. Knowing that one's own company will be continued by people with whom one has worked trustfully for many years makes the necessary "letting go" easier.
A succession by way of an MBO can be prepared calmly and implemented without major upheavals. If necessary, the entrepreneurial succession within the framework of an MBO can also take place as a multi-stage succession process, i.e. the former shareholder can dispose of his shares in several steps, whereby the majority is usually sold in a first step.
It may be conceivable and quite sensible that the company retires from active management but supports the acquiring management as an advisor or member of an advisory board for a transitional period. Especially if the selling entrepreneur has critical know-how or very close customer relationships, a succession structured in this way can ensure an even smoother transition.
MBO & Management
For many employed managers, an MBO is a unique and calculable opportunity to take the step into self-employment. In contrast to external third parties, the company's own management can assess the opportunities and risks of the company well.
Furthermore, the perspectives for the management are certainly different in an MBO than in a takeover of the company by a competitor.
The possibility of taking one's fate into one's own hands is highly attractive for many managers.
MBO & Private Equity
Investment companies can be the key for management to access capital to finance the MBO. Management usually does not have the necessary financial resources to finance the purchase price for the company on its own.
The participation of private equity closes the gap and offers the management the possibility to implement the MBO with a comparatively low capital investment.
Furthermore, investment companies are generally willing to grant MBO managers very attractive investment conditions.
Independence & Stability
For the management, the involvement of a Private Equity Investor is not only attractive for financial reasons.
Private Equity Investors also generally grant the management a maximum of freedom in the management of the business, as active participation or influence in the day-to-day business is usually not sought.
On the other hand,Private Equity Investors bring experience in strategic issues and support the management as "sparring partners". Many PEs have a broad network of experienced industry experts who can support the respective management teams in operational as well as strategic issues. Typical examples of such issues outside of day-to-day business are foreign expansion, digitalisation or process optimisation. Due to the management's participation in the company's success under company law, the monetary goals of the management and the investment company are identical.
In addition, the involvement of such a financial partner facilitates the implementation of the actual company acquisition. The process of a company acquisition is new territory for most managers, for an investment company it is more of a daily business.
From the point of view of the selling entrepreneur, the involvement of an investment company in a management buy-out also has various advantages. On the one hand, an investment company makes an MBO possible from a financial point of view. On the other hand, good investment companies act very professionally and therefore ensure the greatest possible degree of transaction security.
Alternatives
Not all companies have a management that is able and willing to take over their own company. Not everyone can or wants to take the path from employee to entrepreneurial independence.
In this case a Management-Buy-in ("MBI") can be a suitable alternative for structuring entrepreneurial succession. In this case, a manager or a management team is sought that not only takes over the management in whole or in part, but also participates in the capital of the company at the same time.
This is usually also done in conjunction with a Private Equity Investor.