What is an MBO?
An MBO is the acquisition of a business by the Management, in most cases with support from an outside investor. Often the Management itself is only able to put up limited own funds and thus has recourse to bank loans. The loans are paid back with cash flow generated by the business after the take-over. Strictly speaking, this is known as a leveraged buyout or LBO, although in practice the term MBO is also used.

Good for your business
An MBO take-over is a good deal for the business itself. The new owners-directors are strongly motivated as their own investment is at stake. They already know the business from top to bottom thus avoiding a familiarization period with an accompanying dip following the take-over. Furthermore, with an MBO your business is not “up-for-sale" for a lengthy period, avoiding a drop in value and lingering uncertainty for the staff.

Take the initiative yourself
In most cases an MBO is initiated by the senior managers of the business, but nothing prevents you as the owner from taking the initiative yourself, for example at a time when the business is running really well and thus will allow a high price. You can either negotiate directly with the Management or organise a private bid involving both Management and one or more prospective outside investors.

Fair valuation
It is quite understandable that you should want the highest possible sale price. On the other hand, too high a price would be an impediment to the generation of cash flow within the business. The business would then be unable to invest sufficiently, would find it difficult to pay back loans, and ultimately see its future under threat.

In order to settle on a realistic purchase price acceptable to both parties, an outside specialist can be called in. A specialist is useful firstly as he keeps track of the developments in your sector and knows at what prices comparable businesses have changed hands, and secondly because the objectivity of an outsider can save much time and energy during negotiations.

Negotiating while remaining on good terms
As far as you are concerned your business is your life's work; for prospective investors it is their dream of a lifetime. In this situation emotions can surface which might seriously disrupt negotiations. Here too, an outside specialist can prove useful. By acting as a sort of “buffer”, he can ensure that your relationship with the investors does not become soured. Should negotiations break down and the MBO finally not go through, you can then recommence work with your managers with your good relations intact.

Appropriate funding
A typical MBO is funded - in descending order of risk- with own funds and/or subordinated loans and lastly with conventional bank loans. Managers themselves and the outside investor, usually a private equity company, are responsible for own funds and subordinated loans.The seller himself may even make funding available in the form of a subordinated loan. The remaining funding almost always consists of conventional bank funding.

The main thing for the Management is to adopt an appropriate own funds/loans ratio. In exchange for a high risk, the provider of capital wants a suitable return which can only be realised when the business is sold on some years after the MBO. Traditional credit providers on the other hand run a different risk and consequently have different i.e. lower return requirements. Interest owing on loans is also tax deductible for the business.

Also available to supplement own funds and bank loans for take-over funding is what is known as mezzanine financing - literally “floor in between”. This amounts to a subordinated bank loan for five to ten years to be repaid after the conventional bank loans. Meanwhile the investors only pay interest so that the funding has minimal impact on the cash flow of the business.

Management may also fund the take-over by using invoice finance, or factoring. A specialist factoring company can be very useful in that it will have a thorough knowledge of the sales ledger and know precisely what it is worth. An additional bonus for the Management is that this type of funding does not require personal exposure on their part.

The legal structure of the company should also be adjusted in good time with an eye to maximum profit. As a seller, you benefit most from a holding company. The holding company sells the shares of the working company and there is no tax due on.

Fortis: a versatile approach to MBOs
The Corporate Advisory department at Fortis is extremely well placed to guide you through an MBO. The experts at Fortis will draw you a clear picture of the entire transaction, guarantee a fair valuation, and support you during negotiations.

Our Corporate Advisory staff will work out a suitable funding structure with you and the purchasers. In this way they will obtain for you the best possible sale price without jeopardising the success of the MBO and the continued existence of your business.

In this instance, the Fortis Private Equity (FPE) department can act as financial partner. FPE - also referred to as venture capital - provides own funds and/or mezzanine financing to successful medium-sized businesses with sound growth prospects, committed management and market leadership. It gives support to the development and growth of the company over the various phases of the life cycle.

Do you wish to sell your business? And are you thinking of using an MBO?
Then contact the Business Centre in your region: all the know-how of the Fortis Group at your fingertips through one contact.

The do's en don’ts of a successful MBO

If you have an MBO in mind, then revise the legal and financial structure of your company well beforehand. In this way you can negotiate a better sale price. Do not go for too high a sale price. Too high a price will prove too great a burden on cash flow and threaten the very existence of your business. At all times maintain good relations with the Management. If the MBO is unsuccessful, you will have to start working with them again as before. From the outset, get the support of a specialist. He will be familiar with the supply and demand for companies in your sector, will guarantee an objective valuation of your company, and is used to negotiating effectively.