A management buy-in (also known as an MBI) is a common form of business acquisition in which a new leadership team takes over the business. When a change in management is required, it can be a great way to turn around a struggling company and reach unprecedented growth.
However, completing an MBI isn’t easy. There are numerous factors to consider, including funding the buy-in and ensuring the best conditions are created for the company’s growth.
Before committing to an MBI, it’s vital to do your research and understand how to overcome these obstacles. Below, we’ve listed the potential challenges you might contemplate – and how to avoid them as much as possible.
What is an MBI?
An MBI occurs when an external management team buys out the existing leadership of a business, thereby becoming the new owners. They typically will not have extensive experience within the company, unlike a management-buy out where an internal team takes over.
When the process is complete, the buyer will take control of all assets in the business and be able to make changes as they see fit, including staff, operations and structure.
MBIs are most common in companies experiencing difficulty and requiring new direction to get back on track. In these instances, an external team is helpful as they can bring a fresh perspective to the operations and identify necessary improvements.
They will also implement change through their varied knowledge and contacts to maximise potential. Most MBIs will come from teams with prior experience in turning around companies.
It’s also a practical option as it does not rely on internal staff willing to buy out the management and with the skills to lead the company, as a buy-out would.
The challenges of an MBI
If you are considering an MBI, you need to consider many factors, including ensuring the buyer and the company being sold are a good fit for one another and raising appropriate funding. Below, we have outlined the key challenges.
Adapting to change
With an MBI, a completely new team will become the company leaders with little familiarity with the existing operations. As such, it may be difficult for staff to accept the leadership and possibly lead to demotivation in the early stages. There will also likely be a longer adjustment period, especially if the management brings many adjustments to processes and policy.
It is worth noting that the bringing in of new management can have advantages, especially as they, in the main, have experience of successfully running other businesses and offer a neutral perspective to what needs to evolve.
Regardless, by engaging in an MBI, the seller is leaving their business susceptible to a great deal of change – including a new board of directors, adapted processes, and even staffing adjustments.
If the company requires a turnaround strategy, this change is undoubtably needed – but it can be hard for the original owner to let go of their legacy. Similarly, they may have relationships with people still involved in the business, such as staff and directors, who they wish to protect.
There’s also the chance that the MBI does not bring the desired effects. This will disappoint everyone involved and could bring the company’s eventual end. Due to this, it’s essential to find new management that fits the business’s values and have the expertise to maximise its growth potential.
The fit between buyer and the business for sale
Due to the likelihood of change when a new management team takes over, it is essential to ensure that anyone who comes in fits the existing culture, if that is the right course of action, sometimes it is the culture, itself, that needs changing. By doing so, any changes are more likely to be well received – with a smoother adjustment process.
There are many considerations to make here, including whether the leaders can work with existing staff and share the company values.
As the buying party, you should seek to spend time in the company to understand the business and whether it suits you. It’s also crucial that, if you do complete the MBI, you take a tactful approach that brings stakeholders on board. This will prevent staff from feeling alienated, leading to demotivation, disruption and increasing staff turnaround that halts progress.
The negotiating stage
An MBI can be a long process, which requires company valuations and extensive negotiations to find a deal that works for everyone. Both parties will seek the best terms for their interests.
Due to this, it will take some time to reach an agreement that suits everyone, with plenty of going back and forth. It’s also essential to arrange the deal through someone who can be a neutral voice and understand the goals each side is trying to fulfil. This will allow the agreement to survive, rather than one party walking away from the table.
Securing funding
Part of the MBI process will be securing the funding to finalise the buy-in. This is typically a mixture of equity and debt funding, provided the buyer can find an investor willing to support the company. This means being able to showcase the growth potential and the ability of the new team to lead the business to success.
There are other options for finance, including:
- Bank loans
- Seller financing
- Buyer investment
Smaller-scale MBIs will often be funded against the business’s assets (such as debtors, equipment and premises). The new owners will be expected to contribute to the purchase price, leaving them at a personal financial risk that they must be prepared to undertake. However, this signals that they are committed to the purchase and will be more invested in its success.
Conclusion
An MBI is an excellent option for selling a business, especially if a new perspective and leadership are required for resilience and growth potential. It can also be a helpful way for the buyer to acquire an established company.
Depending on the company’s needs and the seller’s vision, one of the most important factors is ensuring a match between the company culture and the new team coming in. This can place a failing venture back on the right path, with adjustments that stick.
By understanding the specific challenges of an MBI, you will know what risks you are undertaking and can make the necessary considerations to put together a robust deal that suits all parties and drives long-term success.
The first hurdle to overcome will be obtaining the finance you need to cover the buy-in. There are a variety of solutions on the market which can enable you to find one that suits your needs and leaves no funding gaps.
If you are looking to fund a management buy-in, we will work with you to pinpoint suitable external solutions.
Get in touch today to find out more.