Why choose an MBO over a trade sale?

There are numerous benefits of an MBO process over that of a trade sale for both the management team and the vendor.

From the management team’s perspective, they get rid of the uncertainty that new ownership will bring whilst also gaining the opportunity to benefit more directly from future success than they would do as employees only. The management team should also be familiar with the company’s customers and suppliers as well as its trading cycles and history making it a far more attractive proposition than looking to acquire shares in an unfamiliar external entity.

As the team may well understand the operations of the company better than the vendor, the scope of the due diligence exercise is often a limited one bringing the costs of a transaction down.

From the vendor’s perspective, the information sharing exercise will be limited to internal parties as competitors often feign interest in a company purchase in order to gain access to information necessarily supplied to potential suitors.

Negotiations on pricing and structure are usually more ‘friendly’ than would be the case for a trade sale with all parties usually able to agree major terms between themselves without the need for a protracted (and often costly) process.

As the purchasers are already responsible for the day to day running of the company, the warranties provided by the vendor upon sale are normally much less onerous than those provided in a transaction with a third party.

An additional benefit of an MBO process for the vendor is the added comfort of leaving the business to a team that you have faith in (as opposed to a trade sale where comparatively little is known about incoming management). This is twofold in that you can be confident that the business won’t fold imminently after a deal is transacted (therefore avoiding negative press) and also the security it provides that any deferred consideration will be received.

Funders are receptive to lending to such transactions as they can gain comfort from the fact that the team in place has in many circumstances been responsible for the running of the company to a large degree anyway and so the risk of default (due to adverse change) is deemed lower.

More on management buyouts…

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