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Consider a Management Buy Out

Posted on August 19, 2017

Many people selling their business rule out their Management Team or a Manager as potential buyers because they assume that their employees or key management don’t have the financial resources, necessary skills or motivation to become buyers.

Not considering a Management Buy Out (MBO) effectively eliminates a potential group of buyers that have advantages over other buyers. The advantages over other potential buyers are:

  • Smooth transition of the business
  • Greater acceptance by the employees
  • Less disclosure of confidential information
  • Management already knows the business.
  • Banks love MBO’s because of the experience and continuity
  • Can be a staged management buyout
  • More confidence in a VTB
  • Management can feel empowered and see this as an opportunity to increase their personal wealth. Very motivated.
  • The seller has more comfort that vendor financing, if required, will be repaid.

Often employees have inheritances or friends with financial resources and business skills.

A seller might consider a staged sale to employees, where they can buy into a portion of the business and earn the balance while being mentored by the seller.

Why not consider a staged MBO as part of a succession plan?  As the Manager matures as the owner and driving force of the business, the seller can gradually transition out.

Often, the current banker would be prepared to finance the management team because the Lender is familiar with the business, is most likely familiar with the Manager and sees such a sale as a less risky transition of the business.

Whether selling to a Manager or to a third party, the seller should start delegating and transferring the Goodwill to his employees in any event. 

The Summit Group would be happy to meet with prospective sellers to review the advantages, disadvantages, process, timing and planning for an MBO.

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