Succession Planning: Business owners favour MBO as means of selling business

Whilst the economy continues to wobble with an increasing number of vendors struggling to find trade buyers for their ventures, more and more business owners are considering management buyouts (MBOs) as an option of selling their businesses.

According to The Telegraph, the number of business owners who would consider MBO as their exit strategy has tripled in the last three years. However, selling a business to management still remains an unpopular choice amongst a high number of owner-managers as they perceive it to be a more challenging and riskier deal to execute. Andrew Haigh, Managing Partner at Coutts Entrepreneurs, said: "By ruling out a sale to their management team, [business owners] are closing down a potentially attractive exit route, which accounts for 20% of business sales."

There is a common misconception - a perceived risk - that managers would not be able to raise necessary finance to purchase a business and once the talks begin about management buyout that the relationship between the owner and the managers would change. All deals present a certain number of risks. So does MBO, it's just a different set of challenges. Any vendor should consider management as potential buyers for their business, especially in today's volatile economy. Why? Because managers would have been closely involved in building your business with you, helping it become what it is today. They would know your business intimately, how it operates as well as the market and your customers better than anyone else coming in from the outside.

A research carried out by The Corporate Finance Network amongst businesses with turnover of less than £10m and vendors aged over 60 found that 80,000 companies stopped trading in the last year, and not as a result of insolvency. As many as 80% of business owners would have simply retired due to the lack of succession planning and failure to make the business attractive to potential buyers.

Exit planning is key to a successful and satisfactory business sale. MBO is no exception. Coutts' research shows that out of all MBO respondents, none of the businesses interviewed had any plans in place to move forward with a buyout option when the time came; and whilst 42% said they knew what to do, less than a quarter (22%) sought professional advice. If a deal is to be a success, then both the vendor and the management need to be thoroughly prepared well in advance.