What are the Benefits of an MBO?
If you are currently working in a management role but with no (or limited) shareholding in the business, by taking the next step and investing a relatively small amount of money in an MBO transaction, you could stand to significantly increase your personal wealth in a short period of time. A bank or funder will support you financially for a number of years but once the finance is repaid you will have gained an equity value in your own business for a small investment.a
The graph below depicts an MBO deal where the business is worth £5m at the transaction date. Management are required to invest only £200k, the remainder of the deal is funded by debt of £3.8m and deferred consideration of £1m. As the value of the business increases under new ownership and the level of debt is repaid, the value owned by the management increases substantially. After 5 years the business in the illustration is worth £14m, all the debt is repaid and 100% of the business is owned by the management. Therefore, after a £200k stake and 5 years work, the management have made 69 times return on their initial investment. Even if the business didn’t grow managements’ value would still yield a 25 times return for the MBO team.
An MBO also provides you with job security. If your employer sold to an external party the new owners may take the decision to replace management with their own team.
Commencing an MBO transaction may however put strain on your relationship with your current employers, and they may feel uncomfortable divulging sensitive company information to you. This process needs to be managed with the assistance of external advisors.
You will also need to put 110% effort into the venture to convince funders of your commitment, as well as having a defined strategy for continuing the growth of a profitable business which can meet its debt repayments and has a healthy future.