Facing the daunting prospect of selling your business to a third party (a competitor, financial buyer or perhaps a strategic buyer) may make you go weak at the knees.  An adviser or friend may say “have you thought about encouraging your team to do a management buy-out (MBO) of your business?”.

The MBO sounds a friendly sort of thing (and can be).  What could be better, you may think, than to sell to your trusted team:  people who know you, your business and the market in which it operates.  No worries about intrusive and risky customer or supplier due diligence you may (rightly) think.

The team does not have the money you will quickly note.  But then everyone says that for the right opportunity money is never a problem.

What then would be the reasons to be fearful of the traditional MBO as the route to your freedom?  Here are our top reasons to be afraid:-

Complexity:  an MBO can be a very complex process which challenges the most skilled management team.  Your team must first be clear on its composition (perhaps there is a person who is not performing or who does not really fit in) and how they are going to cut the equity cake in the new company (Newco) that they will need to form as the vehicle for the MBO.

Your team must find an advisory team:  an accountant and lawyer but other advisers (such as a surveyor to value land or a pension adviser) may be needed too.

Tricky Price Negotiations:  your team must decide on the price they will offer you for your company and how and when that price is to be paid.  They must be clear on how they are to raise that money.

Depending on your price expectations and the predictability of the profits and cash flow of your business the MBO team may need to raise risk equity as well as debt.  If the MBO team cannot raise enough debt you may be asked to help by deferring payment on the consideration.

Negotiating this funding in a way that meets the financial and legal requirements of all concerned (you as seller, the MBO team as buyers, a private equity funder and bank) requires great skill and experience.

Losing Control:  for large deals the private equity providers will “take charge”.  They will conceive, negotiate and project manage the process.  They will effectively hire your team as their professional managers to run your business.

The money men will want to cash in their chips within a short time frame:  five years is typical.

Your management team (and you) may recoil at the prospect that they are not going to be owner‑managers as you are but instead hired guns on a short term plan to grow and sell.

Distraction:  the complexity of the MBO process will distract your team from their day job.  The performance of your business may suffer.

Demotivation if deal falls through:  imagine too if the process is ultimately unsuccessful.  They and you will be demoralised and you will have made your ultimate exit that might be more difficult.

Conflict with you:  inevitably the MBO process will lead to the potential for a great conflict of interest with you.  Your price expectations may be challenged.  The payment profile you want may be said to be impossible.

If you are dizzy at the risks and uncertainty you are not alone.  Encouraging your team to allow you to exit through an MBO is fraught with danger and risk.

But there is an alternative. A very powerful technique:  the Vendor-Funded MBO that you and your advisers control and manage.

It may just be the answer you are looking for 🙂 .