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How To Evaluate A Business For MBO

A common strategy when selling a business is a management buyout, or MBO. The term, management buyout, refers to when the management team of a company pools all of its resources to acquire a substantial share or all of the business that they work for. Often, the management team does not have the necessary funds available to complete the acquisition, so they must fund it through outside lenders or promissory notes between the original owners and the management team. So, how does a management team know when the right time is to execute a MBO? Let’s look at a few key factors:

  1. Typical MBO Candidates:
    1. Corporate Seller – A certain business division wishes to exit the business confidentially until the transaction is complete because they believe exposure to competitors is too risky.
    2. Private Owner – Someone with a large stake in the business is looking to retire and is considering selling the business to management because they have trust that they will make the right decisions going forward.
    3. Distressed Situation – Something occurs that makes the speed and familiarity of the transaction the most important aspect to the seller.
  2. Leadership, Leverage, Liquidity:
    1. Leadership – A team with a well-defined, comprehensible plan is primed for success with the business. The new leaders of the business should demonstrate an understanding of the business and how to create a continuous, successful cash flow. Getting the deal at a low price is the gift that keeps on giving.
    2. Leverage – Is the price a good one or does it involve too much leverage. Does the balance sheet have the strength to handle this buyout? Can the company apply free cash flows from the business to pay off the principal and interest expenses of the senior debt?
    3. Liquidity – A company with low working capital and high cash flows will have the necessary funds to pay down the debt. Prepare for the unexpected as it always costs more and takes longer. Extra cash on the balance sheet is a MBO’s best friend.

Evaluating your company for these factors will help you decide whether or not it is the right time to complete a management buyout.

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