5 questions you need to ask about MBOs
September 6, 2022
Jim Houghton of Waypoint Partners
PR Week’s recent piece on what you need to bear in mind when considering a Management Buyout (MBO) included insights from Jim Houghton – and triggered some additional thoughts from him. Here are five things you need to know about MBOs…
In the world of PR and marcoms, MBOs are certainly less niche now than they were in the past. Some are built around third-party buyouts and others around succession, but in either case there are five key questions to bear in mind:
- What’s the appetite for risk?
There can be a big gap between the management team’s and founder’s appetite for risk when an MBO is on the table. Without having had experience of it, managers can underestimate the significant personal and financial risk that comes with being an owner.
There’s a quantum leap in understanding the real nature of risk once you become responsible for things like employee livelihoods and potentially face re-mortgaging your house.
- Where will the money come from?
There’s also the tricky issue of where the money comes from to pay for a management-led MBO, bearing in mind the owners expect to be paid!
Most of the liquidity within the business will sit on the balance sheet, owned by the leaders/founders. That means the funds for management to enact the MBO will be paid for from future profits, which means confidence in that team to run a successful business needs to be very high.
- How do you negotiate a fair deal?
There is the difficulty in negotiating a fair deal, having the courage to sit down with your boss to have this kind of sensitive conversation.
If you’re a third-party acquirer, you can simply walk away if you can’t agree, with little in the way of hard feelings. However, if people who already work together and will continue to do so can’t agree, then that’s a whole different ball game. As a result, this kind of MBO has tended to happen less often than the third-party approach or a traditional trade sale.
- What are you looking to achieve?
Having said that, we are facing down a slowing economy and traditional M&A and individuals looking to MBO into a business will become more conservative, focusing instead on running their own operations successfully and keeping funds available for that.
Recession or not, an ambitious 30- or 40-year-old practitioner will still want to achieve certain things at what is a crucial time in their career. And where there might not be a trade buyer or third party MBO on offer, or the conditions they set are unacceptable, the management team-led MBO could look like a logical, safer, friendlier, more flexible option.
People always get more creative and braver about taking on those difficult conversations when there might not be another option.
- What does the future hold for MBOs?
On balance, we are likely to see more MBOs, but they’re still unlikely to drive much in the way of headlines because they are too private and too personal. There’s also a bit of a stigma surrounding them because they suggest a lack of third-party appetite, which in turn signals a less than successful business. That might be far from the truth, but perceptions matter.
However, there is one particular flavour of MBO that has taken off in the last five years, and that is the Employee Ownership Trust, a government-backed initiative that is highly tax efficient for people who currently own a business. More importantly though, as the concept of wider employee ownership of companies and stakeholder participation pick up pace, this vehicle appears increasingly aligned with society as a whole.
In conclusion, MBOs will become more commonplace as the economy gets tighter. But economic and societal factors will act as a trigger for people to ask how a company should be owned.
For example, does it actually need to be 75% owned by a founder(s), or would it work better via wider participation and ownership by its employee group? These latter kinds of structures are not that difficult to pull off. In fact, they remove pressure on valuation because of the way the tax benefits work, so we might see more of this specific flavour of MBO.