What are the pros and cons of management buyout?

A management buyout is where the ownership party of a company sell the business to members of the management team. Getting advice before a management buyout is essential for extracting the right value. Below we explore the pros and cons of management buyout.

Pros

Faster

The sale process should go faster than usual. Although there are still plenty of legal complexities to sift through, due to the existing relationship between management and ownership, it should be easier to progress.

Easier to find a valuation

A management buyout should make it simpler to agree a valuation. Ownership has a relationship with the buyers in this case, and the management team should have the insider knowledge to come up with a fair price for the business.

Confidentiality

By selling to an internal management group, it should also maintain confidentiality of business information. Sometimes, when receiving bids from outside sources, the ownership will have to divulge key information before the sale. But with a management buyout, any confidential information remains within the business.

Less upheaval

Cons

Different skills required for ownership

Adjusting from a management role to an ownership role can be difficult. Even if you’re a skilled and experienced professional, switching to the demands of an ownership role is challenging. Without the necessary experience in the ownership group, it can be difficult for the company to remain successful.

Raising external funding

Even if a valuation is agreed, it can be tricky for the management group to raise the funding required for the deal. They’ll most likely have to seek external financing, and this can be a lengthy and uncertain process.

Damaged relationships

If the management buyout collapses it can also damage relationships. Even if it’s not personal, it can be difficult to keep the business functioning with an impaired management group.

Lower business valuation

Usually, you’ll receive a lower valuation from a management buyout too. The management team will need to raise funds via the market for the purchase and will usually need a lower price to be successful.

There are benefits and drawbacks to a management buyout. As long as you’re aware of the potential pitfalls though, you should be able to navigate any issues and sell your business at a fair price with the peace of mind that a reliable ownership group is in place.