Management Buy-Outs (“MBOs”) are surging in popularity. Financial institutions want to invest in them and management teams see significant potential upside in mastering their own destiny.

Many MBOs eventually list on the stock market or are sold to strategic buyers in the sector providing an exit for the original financial backers, and result in significant wealth generation for the management teams involved.

Whilst the rewards of an MBO can be stellar, the prospects for staging a buy-out are relatively daunting. Anyone considering the idea will naturally have some doubts, reservations and questions about what is likely to be a “once in a lifetime” transaction.

A buy-out is potentially an exhilarating and a stressful experience at the same time, the source of which is often out of the management team’s control. A well-rehearsed understanding of the potential issues and decisions you will face during the process are much more likely to enable you to have a successful outcome.

We have identified ten of the most common questions of management teams contemplating a buy-out. The few minutes you spend reading these answers may provide you with the encouragement needed to pursue owning your own business.

The initial role of your adviser is to ensure that the vendor regards the management buy-out a credible option, and ideally, the best possible option.

Believe an MBO might suit you?

If you believe that an MBO is for you, the next step is to consult an experienced adviser.

Lumina Advisers have significant experience of MBOs and advising management teams, vendors, private equity funds and financiers across a wide range of geographies and industries.

Our style is to establish at the outset if your deal can be successfully completed, before any approach is made to your owners or financiers. We won’t waste your time or risk your existing relationship with your shareholders, employer or risk our professional reputation.

If you feel an MBO may be right for you and your team, email us to arrange a confidential discussion at or call us on +971554916442.

  1. When is a good time to approach the owners of my company?

The timing of a buy-out approach requires careful planning and consideration. You may be able to instinctively judge when the existing owner may be more conducive to an approach, or indeed desires or needs to sell. For example:

– The parent company has liquidity constraints, or worse, is faced with liquidation

– The parent company has recently decided to focus on other core activities

– There is a freeze on capital investment and hiring

– There is lack of succession in a family owned business

– Regulatory changes are constraining growth of certain business units

– You are currently in an interim C-level role guiding the business through a sale

If you sense circumstances that may lead the owners of your business to contemplate a sale, you should seek experienced and independent advice prior to making any approach.

  1. How do I approach my existing owners?

Your team, with your adviser, should consider carefully whether an MBO is appropriate and has a reasonable prospect for success before deciding exactly how an initial approach should be made.

An MBO approach handled poorly can have significant adverse effects. Some owners may regard it as a sign of disloyalty, and even as grounds for dismissal, particularly if they believe you are being opportunistic and seeking to buy the business cheaply.

Clearly, much depends on your existing relationship with the shareholders. A good adviser will help you identify potential sensitivities and craft an approach with you that ensures the owners regard your team as a welcome and credible bidder.

“Your adviser will use a number of valuation techniques to determine what price should be offered, but most importantly what price can be financed”

  1. What is the business worth?

The usual factors in valuing a business apply including profit history, financial projections, market positioning and benchmarking recent transactions of similar size and sector. An understanding of other likely potential bidders and the value they may place on the business is also key.

However, with an MBO the business’ expected cash generation in the first few years following the buy-out is an additional key consideration, as any deal is likely to be financed with some form of debt, which will need to be paid down from the operating cash-flows of the business.

Your adviser should use a number of valuation techniques to determine what price should be offered but, more importantly, what price can be financed. Like any business acquisition, the final price will usually be agreed through negotiation and deal structuring.

  1. How long will it take to complete the MBO?

You should expect the process from initial discussions through to completion to take four to six months. Deals can be completed quicker with real commitment from all parties, but they can also take much longer, particularly if the business and circumstances are more complex.

Regardless of the timescale, the commitment to the buy-out from the management team will be significant, and in parallel to maintaining the “day job” which is keeping the business that you will own functioning in the best possible shape during the entire process.

“Financial institutions will be financing the business but they will be backing you, the management team”

  1. Will I get financial backing?

Private equity funds and other finance providers typically place considerable emphasis on the quality of the management team and the potential for them to deliver on a business plan.

To raise finance it is vital that the MBO team has the relevant experience and commitment to succeed.

The team will have to successfully articulate the potential opportunity and present it in a form that can be evaluated, by way of a formal business plan. It is critical that this document is a fair reflection of what the team believes is achievable and does not exaggerate either the opportunity or management’s ability to deliver.

Most private equity providers will seek to exit the business within 3 to 5 years and the business plan will need to demonstrate that there is a good prospect of exit and achieving the right level of returns in that timescale.

  1. How do I approach potential financiers?

Ideally you don’t, instead leaving it to your adviser. Using their knowledge and experience of the financial institutions, your adviser will introduce you to the most appropriate finance providers for your team, industry sector and nature of transaction.

Private equity providers are extremely sophisticated and will generally already have a good understanding of the market in which your business operates.

Before meeting with potential finance providers, your adviser will challenge your plans and projections and rehearse mock presentations with you, to ensure that the management team and the business plan stand up to scrutiny, and provide the appropriate financial returns under different scenarios and sensitivities. Your adviser will then be in a position to help negotiate the most favourable financing terms on your behalf.

“Your focus should be on the potential gain on exit rather than the actual percentage of the business owned”

  1. How much will we have to invest in our MBO?

The overriding principle is that each member of the management team will need to demonstrate that they are financially committed to the venture without being excessively financially stressed. This means that the investment can vary within the team.

For example, a Director with a large mortgage and young family would typically be expected to invest less than a Director who has repaid his mortgage and children have left home.

Typically the CEO elect would have a larger equity stake than the other Directors, but there are no hard and fast rules. It is however important that the team members agree beforehand as to how the shareholding in the new venture will be split. Your adviser will be able to provide guidance on this aspect, and more importantly, how financial backers will view the proposed shareholdings.

  1. What percentage of the business will the management team own?

This depends on how much equity is needed, and the importance of you, as a management team, to the deal. In larger deals management stakes tend to be low and the reverse is true for smaller transactions.

Whilst private equity providers will seek to maximize their potential returns they will also want to ensure that the management team is sufficiently motivated. The overriding principle being if the business performs well, the management team will generate significant wealth for themselves.

One of the key roles of your adviser will be to ensure that you negotiate the highest ownership stake possible, without having an excessively leveraged financial structure.

Your adviser will be able to give you an early indication (before discussion with financial backers commence) of the level of equity you are likely to achieve in the MBO. However, your focus should be on the potential gain upon exit rather than the actual percentage of the business owned.

“The business plan is your vision for the business. Use the plan to sell the opportunity and yourselves”

  1. What due diligence approach will potential financiers undertake?

Private equity funds and other finance providers will be making an investment decision based not only on a detailed analysis and assessment of the business plan and management, but the ability of the management team to successfully deliver on that plan. You must demonstrate that you can work seamlessly together both personally and professionally. If there are any issues, these need to be resolved early on.

Knowledge of your business and the market in which it operates needs to be complete and thorough. In more complex or specialist sectors, investors may commission an independent market study, or indeed may already have in-depth knowledge of the sector, so your competence and credibility will be tested at every step. It is you they are investing in.

  1. What are the personal risks for the management team?

In the event that negotiations are unsuccessful, the management team must ensure that they can still work with the present shareholders and other senior management. Before you make an approach about an MBO it is therefore essential that you consider the likely impact on the team’s relationship in the eventuality of an unsuccessful transaction.

Having your adviser and financial backers front the deal negotiations can often help in preserving an existing good relationship between the management team and the owners.

By investing in an MBO you are taking equity risk and can potentially lose your investment. However, by obtaining good financial and legal advice, the risks can be significantly reduced. Your adviser’s role is to control your risk/reward balance. Ultimately the success or failure of a well-structured MBO should largely be dependent on your performance as a management team.

To find out more about Lumina’s Transaction Advisory services offering, click here.