Management buyouts: Common mistakes and how to avoid them

Steve Hale partner at Perrys Chartered Accountants, here he discusses management buyouts, the common mistakes that are made during the process and how to avoid making them.

Much has been made of the state of the great British pub trade, which has sadly seen a decline in recent years with dozens having to call last orders for a final time.

But on the back of these closures a new circumstance has come about with communities clubbing together to buy up their local and keep it open. And these community ownership schemes – in which neighbours get together to manage something they have good knowledge of – share some similarities with management buyouts (MBO).

Instead of neighbours banding together, MBOs see existing managers from a company join forces to buy the firm they work for, going from employees to owners.

The funds needed to complete an MBO are substantial and requires a great deal of planning. Here, we look at the common mistakes that can be made during an MBO and how best to avoid them.

MBOs – a brief run down

An MBO is a transaction where a firm’s existing management team buys the assets and operations of the business they manage. A range of circumstances can trigger a buyout opportunity, but many come about if an existing company owner wishes to unlock their wealth by selling or retiring.

What sets MBOs apart from other deals is that the company is bought and run by people who are existing employees. This buyout route is attractive because the new owners already have expert knowledge of the business and how it is run – rather than an outside firm snapping it up and bringing in external managers, who have to find their feet.

An MBO was proposed for the troubled Tata steel works last year. The firm’s owners invited interested buyers to submit formal bids in May 2016 for all or part of their UK network and among those to come forward was the Excalibur Steel consortium. This bid was led by Stuart Wilkie, the boss of Tata’s strip steel operations.

Since then, however, Tata has announced its commitment to secure jobs and production at its Port Talbot plant and other steel works across the UK.

The pitfalls

One of the key points would-be owners must keep in mind is the transition they will be making. Going from a manager to owner is a big shift and presents a whole new set of challenges.

If you are thinking of going through the MBO process keep these points in mind:

• Be prepared. The process of buying the company can be stressful enough, before you even start on your journey as business owner. Having an advisor on board who can guide you and help with difficult financial decisions will help make the transition smoother, quicker and easier.
• Learn from the past. One of the benefits of an MBO is that you as the new company owner have past experience in how the firm works. You will have also, no doubt, experienced problems as a manager. Keep these experiences in mind and learn from mistakes made in the past – to ensure they don’t happen again with you in charge.
• Making the transition. Alongside the changes to your workload and responsibilities, your mindset will change as a business owner. Having a more entrepreneurial focus will be needed to help grow the company and make it a success. Having to tackle difficult situations and make tough decisions will also be needed on your part.
• Make a commitment. While MBOs have been shown to make a good return on investment, and quickly, the buyout process can see you taking on significant debts. These and outside financiers wanting returns will take precedence and can take a long time to clear, so don’t see the MBO as a get rich quick scheme. By making a commitment you can make a real success of your new firm.
• Follow the leader. MBOs can involve several people clubbing together who may all invest the same amount to make their venture successful. But having too many cooks in the kitchen can be off-putting and confusing. Having one leader who can head up the business is important as it will give your firm focus.

A helping hand

Any buyout process can be complicated, fraught with unforeseen problems and take time. And for those going down the MBO route it can be daunting and stressful, considering the huge finances needed and the fact you will be taking a huge step up into ownership.

Having a team of professionals on board is strongly recommended to guide you through the process and help you deal with any problems as and when they arise.