Management buyouts should be a win-win all round. Owners tend to like them because they can exit their business safe in the knowledge that the team who drove it to success will continue to do so.
For the management team, it’s a chance to become their own boss and, hopefully, secure their own financial future.
And most are funded by debt, because lenders love them too. For a start, “there’s a proven management team behind the acquisition, and it’s seen as the natural next step for the business”, explains Colm Sheehan, director corporate finance at Crowe.
But with interest rates remaining stubbornly high, how such debt is structured can be vital to ensuring that all three parties get the right result in the years ahead.
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One option is to consider the growing number of alternative lenders now operating in the market here. These specialist providers can offer dynamic and favourable terms, in some cases structuring loans for management buyout (MBO) teams on an interest-only basis, with the balance payable at the end of a term.
This allows the new team to go interest-only early on, while they are getting established and building up cash flows.
“It’s typically for businesses who have a high growth trajectory and have opportunities in front of them to grow, but need to protect their cash flows in that short term to be able to leverage those opportunities,” says Sheehan.
It can mean the vendor gets paid upfront even if the lender effectively doesn’t get repaid until later.
There are a number of alternative lenders in the market here now, which is good news, given that the pillar banks – Bank of Ireland, AIB and Permanent TSB – have reportedly contracted somewhat in terms of deal size. But for business owners, there’s a lot to think about when considering an approach from your management team.
“Vendors tend to like the idea of there being a succession, of selling to the people you know, people that you’ve worked with and built the business up with,” says Sheehan. “In terms of deal execution, there’s probably more trust there in terms of getting something over the line, and probably a little bit more latitude from both parties because they know each other.”
But there are challenges too, not least because the management team can often struggle to raise the capital required.
One funding lever they can pull is the delayed consideration, whereby the vendor takes a portion of the sale price upfront and agrees to take the balance later on the basis of the business hitting certain revenue targets. That gives the management team time to generate cashflows from the business, post-sale.
“It can often bridge the valuation gap between buyer and seller and can be contingent on the performance of the business, or just contingent on the passing of time,” says Sheehan.
You’re only going to sell your business once,” says Sheehan. “Ultimately, when you’re going to market you need to be sale ready and that doesn’t happen overnight
— Colm Sheehan, Crowe
Any form of delayed consideration is a risk for the vendor, however, a fact which will likely be factored into the sale price.
Typically the due diligence process isn’t as onerous in an MBO as it would be under an open sale, because the management team pretty much knows everything about the business anyway. However, if the MBO is being backed by private equity, no such latitude will be exercised. It will undertake its own due diligence – and thoroughly so.
For the vendor, the appeal of an MBO also has to be weighed against the competitive pressures of an open-market sale, which has the potential to result in a higher sale price. Whichever route they take, preparation is key.
“You’re only going to sell your business once,” says Sheehan. “Ultimately, when you’re going to market you need to be sale ready and that doesn’t happen overnight.”
While traditionally the domain of medium-sized businesses, MBOs in the small business space are becoming increasingly common, says Keith McDonagh, head of corporate finance at business advisory firm Xeinadin.
Some of it is driven by owners of a certain age who put a good management team in place during Covid and then took a step back, he says. It’s also being driven by owners who were worried about Brexit, took on expertise to help navigate it and, having put such a management structure in place, are now starting to think about an exit, he suggests.
He too believes it is never too early to think about exiting, and certainly by the age of 50 it should be on a business owner’s personal agenda, particularly if they want to make the most efficient use of tax planning.
