A Management Buy-In (MBI) is a transaction where a new management team, previously unconnected with a business, looks to buy out the existing owners and take control.
This differs from a management buyout transaction (MBO) where usually the existing second-tier management, who have full working knowledge and experience of running the business, buy out the owners.
In many cases MBIs can be a successful way for a vendor to exit the business, particularly where the incumbent management team are unwilling or unable to buy the business in an MBO.
Risks with MBIs
There are various risks associated with MBIs that can cause funders to think twice about lending for such a transaction:
- With no prior experience of the internal workings of the business, the new management team may not really know what they are buying until they step through the door.
- There may be key individuals in the business who will be unhappy with the changes proposed and may cause disruption or leave.
- The vendors may be integral to the operation of the business and take with them key information or close contacts which can undermine the value of the business.
For good reason many banks have struggled or been unwilling to fund MBI’s.
The main reason for this dislike of the MBI is most likely due, not only to a combination of the above, but to a number of speculative, highly-geared deals undertaken in the halcyon years which went catastrophically wrong.
Statistics have shown that as many as three out of four highly geared MBI’s failed within 3 years of the transaction taking place, with many lenders having to write off considerable sums.
Hence you can see why the banks would be nervous of funding such transactions, particularly in the current climate!
Our Approach to MBIs
Here at Skipton Business Finance, we take a more pragmatic view to MBIs, as there are a great number of success stories out there too.
We look for signs that indicate an MBI is likely to succeed. For example:
- In some cases, the vendor may not have been closely involved in the business for a number of years and therefore the impact of them leaving can be relatively small.
- Some vendors have allowed incoming management to work in the business for a short period before purchase to ensure they thoroughly understand the business.
- Extensive due diligence at the front end can give incoming management a full understanding of the business.
In truth, it’s all about the quality of the incoming management.
- Have they experience of the sector or transferable skills proven in other sectors?
- Have they had full access to the business prior to purchase and are they sure of what they are buying?
- Has full due diligence highlighted any weaknesses or areas needing attention immediately upon picking up the keys to the office?
- Do they have a robust and realistic plan going forward?
- Have key staff been tied in and kept onside?
I believe the real key to a successful transaction is having the vendor tied in for a realistic hand-over period, ensuring that any issues uncovered can be ironed out before the previous owner has disappeared off into the sunset.
This may involve them continuing to work in the business for the first six months, and so introducing new management to key customers and suppliers. It can also involve a chunk of deferred consideration to be paid after 6 – 12 months once everything has proved to be as it was represented.
Yes, an MBI will undoubtedly carry additional risks than usual.
However, with the right management team and deal structure, they are an essential part of the mix for a vendor to successfully exit their business, extracting accrued wealth for themselves, whilst retaining value and jobs going forward.
At Skipton Business Finance, we take great pride in providing financial solutions that help secure jobs and wealth across the breadth and depth of the country.
If you’d like to discuss a funding solution for an MBI, why not give us a call today on 01756 694933.
"After experiencing a number of different invoice finance providers, Skipton Business Finance were most able to assess our business needs and provide a flexible approach to offering funding" - Malcolm at a haulage company in Lincolnshire