Selling a business to the people who know it best – the existing management team – can often be the quickest and smoothest option. Management buyouts can offer speed, continuity, and privacy but require careful planning, clear funding, and independent advice to succeed.
Management teams tend not to have access to vast amounts of cash and will generally need to fund the deal with debt and may require the support of a seller in the form of earn-out arrangements to complete the deal.
While MBOs can be attractive for both sellers and management teams, they are not without challenges. Aligning on valuation early is critical, as disagreements can derail the process before it starts. Funding certainty is equally essential: management teams may combine senior debt, mezzanine financing, or private equity to make a deal work. In addition, both parties must be aware of potential conflicts of interest and ensure robust governance structures are in place.
With careful planning, clear communication, and the right professional advice, an MBO can preserve business continuity, protect the seller’s legacy, and provide management with the incentive to drive growth.
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MBO transactions are a common feature of the M&A market in Ireland, says Mary Kiely, corporate partner, Eversheds Sutherland. “When an MBO works, it works very well but when it fails, it can be very difficult for all parties.
“The transaction structure will suit a seller who wants to take some cash off the table to retire in stages or reinvest in the business to enable growth.”
MBOs generally bring the advantages of speed, privacy and cost efficiency when compared with other transaction structures, Kiely explains. “From a seller’s perspective, they have deal certainty and avoid having to go to the open market and sharing commercially sensitive information about the business.
“The ‘inside’ knowledge of the MBO team generally means less diligence, fewer warranties and less disclosure. From the perspective of the business, an MBO often means ‘business as usual’ with minimal disruption.”
There are some downsides, however. From a seller’s perspective, you may get less value than in a trade sale, says Richard Duffy, director, BDO Dublin. “On the flip side, you are probably going to have to give something to incentivise management to stay on post the transaction from the sales proceeds.
“If an MBO is not successfully concluded for whatever reason, this potentially risks damaging the relationship between the owners and the management team – which may have a negative impact on the business going forward.”
As such, it is important for both sides to engage the services of experienced professional advisors, who can bring objectivity, facilitate a smooth transaction process but above all will have the knowhow to get the deal done for the benefit of all involved in a timely fashion, Duffy says.
Traditionally, one of the biggest deal risks of a sale to management has been the ability of management teams to source appropriate financing, says Jennie Quirke, corporate partner, A&L Goodbody. “Recent changes to funding structures have now made MBOs more attractive as more recently, there has been an increased uptake in the availability of private equity financing for these types of deals.
“While increased availability of private equity backing for MBOs can apply an efficient (and deleveraged) capital structure to a deal, it can also bring its own challenges to business stability in the context of culture and fund exit objectives.”
In addition, Quirke says, management continue to rely on the more traditional finance option of a combination of senior debt and mezzanine financing. “Funding availability can be volatile at times of market and geopolitical upheaval and accordingly can present an execution risk for the deal. It can also come with onerous conditions and the subordination of vendor financing or deferred consideration to lender debt.”
The success or failure of an MBO depends on a multitude of factors, says Philip Lea, corporate partner, Dillon Eustace. “The first key aspect is valuation – if an MBO team and sellers are not aligned then the deal will fail early. If valuations align then the MBO will need to ensure that their funding will support that valuation.
“Outside of those key aspects, if the MBO is a strong team with a defined vision and can demonstrate to sellers that the business will be in safe hands and preserve the sellers’ legacy this can help drive success.”
If valuation and financing hurdles cannot be overcome, an MBO deal will not be possible, continues Lea. “Outside of that if there is an inexperienced MBO team without clear leadership or the relationship between the sellers and the MBO team is poor then an MBO may not be the right option.”
For a successful MBO, certainty on funding is crucial, says Kiely. “There are a variety options open to the MBO team from pillar banks and alternative lenders to private equity firms and family offices. It all starts with valuation.
“Getting the valuation right will unlock funding. Onboarding an experienced corporate finance advisor early in the deal process is crucial to achieving certainty on valuation and certainty on funding.”
Independent advisers are essential to managing conflicts of interest in MBO transactions, says Quirke. “Both the seller and the management team should have separate legal and financial advisers, with clear engagement terms and no overlapping relationships.
“The seller’s advisers play a particularly important role in ensuring valuation fairness, protecting the seller’s legal position, and providing objective challenge to management’s representations. A robust governance framework, combined with genuinely independent advice, is the most effective means of ensuring that the transaction is conducted fairly and defensibly.”
