The MBO option: When the right buyer may already be in the building
The MBO option: When the right buyer may already be in the building
Richard Duffy, Director, Deal Advisory, discussed the growing trend of management buyouts (MBOs) in The Irish Times, highlighting the shift from debt financing to private equity, which offers a more balanced capital structure for management teams. Read his commentary below.
There are times when the best option for a smooth deal process and easy exit for a business owner is a sale to the company’s management team. But there can be some disadvantages, including lower valuations where the management team takes on a heavy debt burden to execute the deal.
“The management buyout (MBO) investment structure presents an attractive exit strategy for business owners under specific conditions and has become a well-established component of the Irish M&A landscape,” says Richard Duffy. “When structured effectively, an MBO can create mutual value for all stakeholders, as evidenced by notable success stories in recent years.”
MBO teams traditionally tapped funding from banks, as debt finance dominated their thinking as it allowed incoming management teams to have full ownership of a business.
“However, these has been a paradigm shift in the Irish market regarding the benefits of using private equity (PE) over traditional debt-focused financing for management-backed deals.
“This has led to a significant increase in the number of business owners selling to private-equity-backed buyout teams. This has negated the need for management teams to be overburdened by significant leverage on deals and helps them find a more efficient capital structure which can balance the risks and rewards of an MBO.”
Despite this the seller may still get less value than they would in a trade sale, says Duffy. However, in the event of a trade sale they are probably going to have to use some of the proceeds to incentivise the management to stay on post transaction.
“Overall, we still find the biggest hurdle in management-backed deals is the price expectations of incumbent owners of companies potentially over-valuing their businesses,” he adds.