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Considering an MBO or starting a new business – here’s our advice

Director of Corporate Finance, Sam Davies discusses the key facts to consider before embarking on a management buy-out (MBO) or starting a new business.

I always advise anyone considering an MBO to do two things in order to have the best chance of success; be patient and bide your time. Timing is crucial – you have to be ready to buy; the owner has to be ready to sell.

You can’t force a sale. The owner or shareholders need to be at the right point in their own journey and actively want to sell the business. If they aren’t then it’s going to be so much harder to achieve the outcome you want. If they are not ready, then you might need to wait and use that time to prepare yourself for the process ahead.

Think about what your value is to this business? Be honest with yourself – are you the best person or team to lead the business forward? What skills do you bring, what have you personally achieved for the company, what equity can you raise, what will the future look like for the business under your ownership?

Before you broach the topic of an MBO or starting a new business you should also be clear on how it will be funded. Is it an attractive investment option, are you looking to raise private equity, are you willing to invest your own money into the business? An external funder will absolutely expect you to put your own money in if you are asking them to do so and, if you’re not in a position to invest some personal equity then the timing is probably not right for you.

Trust is also key and is built up over a long period of time.  Do the owners trust you to be a good future custodian of the business, protective of people’s jobs and worthy of the customers’ loyalty that has been built up over the years?  Have you proven yourself to be the right person to take over the business? If that trust is not there, then the buy-out is unlikely to be successful.

That trust is often validated by having a stake in the business equity or owning a significant proportion of company shares. It also makes it easier for a funder to get behind you if you also have personal equity to put into the buy-out.

Also, it’s really important to take some time to think about your own personal circumstances before you embark on an MBO or starting a new business. Life as a business owner or shareholder is very different to that of a manager. You need to know that your family are supportive, that you are in good physical and financial health and in a position to commit to business ownership, and the demands that it will inevitably make on you.

Starting a new business

The information was correct at time of publishing but may now be out of date.

Corporate Finance
Posted by Sam Davies
9th January, 2020
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