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How to Avoid Pitfalls in Management Buyouts

For many managers, a management buyout, or MBO, is often their first opportunity at being an entrepreneur. There are several responsibilities and challenges that come alongside being an owner and having independent accountability. The security and comfort that was once there as a manager is no longer a part of the job. The benefits of a management buyout can outweigh the risks, as long as the deal is a good one and the price is not too high. Successful MBO’s require careful financial and organizational planning. The key is making sure there is enough capital to execute the growth plan. The new owners have to be realistic as to how long it will take to move the company in a new direction. It always takes more time and costs more money to do this.

A management buyout can become extremely demanding. There are many pitfalls that can block progress. These include, lack of defined roles, indecisive leadership, organization resistance to change, lack of talent, and lack of capital. To avoid these pitfalls, a management team should focus on three aspects:

Leadership: The new leaders of the business should have a strong grasp of the strategic elements of the business. They need to be steeped in the culture and understand what motivates the employees. They need to communicate clearly and decisively with their employees and convey a sense of urgency to the team to move in a new direction. Without strong leadership, an organizational vacuum develops and employees default to bad habits and gossip.

Organization: MBO’s are viewed positively by employees because management is now the owner of the company. Often, new business development requires new skill sets which means new employees will be added. This creates energy and can move a company more swiftly in a new direction. Management must get employee buy in to move in a new direction or else these employees need to be replaced.

Capital PlanningMBO’s usually involve a fair amount of debt and can often leave a company with large debt service payments. Management should overcapitalize their deal and start with a surplus of cash or extra availability under the revolver. There are unexpected delays and costs so an abundance of caution is necessary to make sure the company has a healthy level of liquidity.

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