When considering the succession of your business, it can be difficult to know when or who to pass ownership on to.

An MBO is particularly attractive when you wish to keep the company in trusted hands and preserve the culture and legacy that you have built up.

How does an MBO work?

In its simplest form an MBO is when you sell the ownership to the management team running the business.

However, the existing team could be supplemented by bringing in new hires if circumstances are right and an appropriate candidate can be found.

The management buying the business could include family members if they have a commercial interest and role in the business.

The process typically includes:

  • Exploratory discussions with your management team,
  • Training and supporting your management team so that they understand their new roles as shareholders and additional responsibilities they may be taking on,
  • Agreeing a value of the business,
  • Structuring a funding plan which may include assets within the business, personal contributions by the management team taking on ownership, bank loans, private equity funding and/or deferred payments to you as sellers,
  • Forming a new holding company for the management team to share ownership,
  • Submitting tax clearances to HMRC, and
  • Agreeing legal documentation ratifying the terms of the transaction.

Other considerations around the MBO can be how and over what timescale you will step back from the business.

MBOs give an opportunity for a gradual step back as the management team grow into their new ownership role. If the circumstances are right you could see a much faster reduction in involvement.

Often an MBO transaction can see the existing owner stepping back from the day to day running of the business but remaining an important resource for the management team. This could be as a mentor or a trusted advisor role helping the team develop the more strategic approach typically brought from ownership.

The new owners of the company are likely to have worked in the organisation prior to ownership so they might have a better knowledge of the working culture than an external purchaser.

We find sellers increasingly attracted to options that are more likely to maintain the legacy of the organisation they have created.

Why is succession planning needed for MBOs?

MBOs are most effective when you have a dedicated management team and a clear succession plan in place.

We recommend planning your exit three to five years in advance so that there is sufficient time to ensure the management team is established and comfortable with the business to take on the additional responsibilities as owners.

It also gives plenty of time to deal with any structuring points to make the transaction as effective for you as possible.

Without a clear plan, businesses can face disagreements over who should take control, or how responsibilities and profits are shared.

Succession planning should always involve your intended successors and you must be sure that they genuinely want to take on the business and are capable of doing so.

Other senior key employees may also need to be involved in these plans, as disagreements over succession or poor communication can lead to the loss of staff.

If your management team wishes to take on ownership, they should be supported with a clear development plan that bridges any skill gaps with formal training or mentorship.

This process can help with retention of the management team and can be particularly powerful if paired with a share incentive scheme implemented in the years ahead of the MBO.

How can we help you prepare?

Succession planning works best when you review your plan regularly and seek professional advice early on.

Without a clear plan in place, succession can lead to disputes or even an erosion in business value.

Our Corporate Finance advisors can assist you with business valuation and understanding which succession options may work best for your business.

We can support you in building a succession plan that protects your business and provides continuity once you leave while minimising tax liabilities.

If you need advice on your succession plans and how to prepare, contact our team for support.