
Ebook: Company Valuations
In this 2nd edition, we aim to deepen your understanding of company valuations and its real-world applications. We have updated the content to reflect the evolving operational and economic landscape post-pandemic,
In some cases, an MBO is the best answer
In its simplest form, an MBO involves a company’s management team combining resources to acquire all or part of the company they manage. Most of the time, the management team takes full control and ownership, using their expertise to grow the company and drive it forward.
An MBO may offer a vendor an attractive alternative to sale to trade for a variety of reasons; for example, the number of potential trade buyers may be limited, the vendors may be nervous about approaching competitors and disclosing sensitive information, or they may feel strongly that the company and its staff carry on independently in what they believe to be “safe hands”.
In considering an MBO, a number of considerations need to be made, such as the desire, credibility and dedication of the management team buying the company, the availability of finance and whether all parties involved can agree upon the funding mix. If all the boxes can be ticked, the MBO route can provide a vendor with the assurance of their company’s future success and the management team with a significant opportunity to benefit from those successes.
For a company undergoing a change in ownership, the management buyout route offers advantages to all concerned.
Most obviously, it allows for a smooth transition of ownership. In addition, since the new owners know the company, there is a reduced risk of failure going forward. Other employees are less likely to be concerned, and existing clients and trading partners are reassured it will be “business as usual”. Furthermore, the internal changes and transfer of responsibilities between the vendors and management remain confidential, while any due diligence required by funders is often handled quickly.
The strength of the management is a critical factor in contemplating the potential future success of the company. Therefore, any funders pay close attention to the skills, experience, knowledge and credibility of the management team as well as their plans for taking the company forward. And while the management team can reap the rewards of ownership, they have to make the transition from being employees to owners, which requires an adjustment in mindset from managerial to entrepreneurial, and all parties need to ensure this is a transition that is achievable.
Management buyouts can be a complex process and there are various potential challenges that need to be considered and, to the extent that they can be ahead of completion, overcome. These challenges include but are not limited to:
Our team provides lead advisory services to business owners and management teams throughout the MBO process and supports clients through five critical areas.
Considering a management buyout for your business?
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It is rare that a management team will have sufficient funds on their own to buy the company, and so finance is often needed to successfully balance what all parties are trying to achieve.
Our established relationships across debt and equity providers mean we are then well placed to design MBO structures that work for all parties and introduce and negotiate the right financiers on the right terms to support the next stage of the business’ development.
Depending on the proposed MBO structure and funding, there can be various different tax consequences that both vendor and the purchasing management team will need to understand and, as required, put in place appropriate solutions for.
The earlier you seek tax advice in your MBO process, the better it is, as it avoids undue delays further down the line and minimises potential tax burdens for all involved in the transaction. In addition, we work collaboratively with our tax team to ensure that the consequences of any decisions made as part of the wider transaction are weaved into the entire process and planned accordingly.
Considering a management buyout for your business?
Speak to us for more information or to see how we could help.
A further key component of an MBO transaction is determining the purchase price and/or valuation of the target business. The typical valuation methodologies for UK companies are also applicable to MBOs. Our team have extensive valuation experience and can provide both sides with a well-researched and evidenced guide to what fair value should be, why, and in what scenarios the buyers can increase the valuation for when they sell in time.
Beyond valuation, it is also important to consider the deal structure in regard to the timing of payments to the seller and if there are any conditions on performance related to subsequent payments.
These factors will all be considered when calculating an appropriate valuation for the business. In addition, it will verify the affordability of the intended capital structure for the incumbent management team after the MBO is completed.
An MBO can take several months, so the vendors and management team must be ready to fully commit to the transaction for that time frame. This can be challenging since the company must be run as normal and kept on track while the transaction is ongoing.
PMT is the UK’s leading multi-channel retailer of musical instruments and professional audio products. In 2019, Price Bailey advised the management team on its management buyout of the business.
The project team at Price Bailey, spanning our tax, compliance, corporate finance and lead advisory experts, provided a wide range of expertise in order to support all parties through the process. We support in the negotiation of deal terms, sought finance from private equity funds and debt financing, and successfully managed the entire MBO process through to completion. The result: a successful transition in ownership for a fast growing multi-channel retailer who’s incoming management team have gone on to successfully navigate the business through a perfect storm of pandemic shutdowns, supply chain issues and cost rises, and come out strong.
Contact us today to find out more about how we can help you
In this 2nd edition, we aim to deepen your understanding of company valuations and its real-world applications. We have updated the content to reflect the evolving operational and economic landscape post-pandemic,
Learn more on what an EOT is, why it is an increasingly viable exit option to owner-managers looking to transfer ownership to their employees
Price Bailey advise on the sale of an educational psychology business to an Employee Ownership Trust (EOT).
Price Bailey provide financial due diligence services to private equity and infrastructure investment manager group.