Management Buyouts or MBOs are a great way of selling a business and simultaneously rewarding those who have worked hard to make it successful. They are also an exit route for business owners who operate in highly niche sectors where there may not be many buyers, says John Reynard, author of The Spiritual Route to Entrepreneurial Success.
In order to consider an MBO the business needs to be functioning smoothly without the existing owner; clients need to have confidence their needs will be met without the founder of the business at the helm. There has to be at least one experienced and capable manager that wants to step up to the role of CEO and the business needs to have sufficient financial resources to sustain a period of transition and pay the necessary legal fees. Based on my own experience turnover should be a minimum of £1m pa and net profit 20 per cent.
The theory of an MBO is straight forward; the owner transfers over shares and takes an initial payment in the form of cash on completion, fixed payments over 3-5 years and variable payments subject to the future performance of the business. The new owners agree to operate within certain budgetary restraints and provide ongoing management information to the former owners. Should payments not be met legal contracts are put in place to enable ownership of the business to revert back to the previous owners.
Such is the theory. In practice there are huge emotional hurdles to be overcome. The stakes are high and previous experience of such deals, on both sides, is rare. These are exactly the conditions into which the ego loves to create mischief and cause havoc. Limiting beliefs get exposed and if not dealt with disaster can ensue.
Letting Go Prompts Fear
Having built a business from scratch and suffered all the knocks and sleepless nights that come with making a business successful, when faced with the actuality of ‘letting go’ the exiting owner can feel threatened.
Such fears are not logical. In our rational mind we know it’s time to move on but the absolute finality of no longer having a ‘responsible’ role and not going into the office can cause the exiting owner to panic internally. Questions arise such as ‘who am I now?’ and ‘what is my value to the world?’ It is at this moment that the ego may try to invent excuses for backing out of the deal.
Suggestion: If retiring rather than setting up another business have clear defined projects
to progress to once the MBO is complete.
Personally I chose to write a book and become a business counsellor. I see no point giving up work completely, I enjoy it too much.
Not All Managers Make Good CEOs
The first couple of years after the deal are the most challenging. It takes time to transition from being a competent manager to becoming an adroit CEO and some never make it. One reason is that the skill sets are different. Managers can be excellent motivators and administrators, efficient at installing and adhering to systems, but may be risk averse and lack vision. They do not automatically have the intuitive wisdom and innate trust in themselves to handle difficult, entirely new situations. They may blame outside circumstances and other people when things go wrong, rather than asking themselves what they need to learn from the situation.
Suggestion: Ensure at least the new CEO has an appropriate mentor – someone who can challenge negative thinking and allay limiting beliefs.
Intuition Is Key
Our intuition enables us to see behind statistics and forecasts and make useful decisions in spite of incomplete information. It is an inner voice that we all possess and an astute counsellor. It comes with an uplifting feeling, unlocks creativity and brings about win-win solutions. It frequently defies logic, at least initially and is complementary to logic.
All MBOs are based on future anticipated performance and forecasts and as such are best guesses. When making important decisions it is critical to take time to tune into our intuition and check out whether we are comfortable or not with what is being proposed. If we do not feel right we must ask questions until such time as we are completely resolved, either one way the other.
Suggestion: Never agree to anything unless you feel intuitively positive about it.
About John Reynard
By John Reynard: Founded a market research company which over the space of 14 years became one of the fastest growing and most profitable in its sector in Europe, serving blue chip clients from both sides of the Atlantic. He successfully sold the business via an MBO and is now a business coach and author of ‘The Spiritual Route to Entrepreneurial Success – From Harassed Sole Trader to Visionary CEO’.