Compared to Management Buy-Outs (MBO), Management Buy-Ins (MBI) are a relatively uncommon form of takeover. While the process can pose significant challenges, in the right scenario an MBI can also make sense for all parties involved: the incoming management team; the outgoing owners; those financing the deal; and the company in question.
Here, we’ll outline what constitutes an MBI, some of the advantages, drawbacks and challenges an MBI offers and what kind of funding options are available for parties looking to acquire a business through an MBI.
What is an MBI?
Unlike an MBO, in which a team from the firm’s existing management acquires the business from its owners, an MBI involves an exterior management team taking over. This simple fact naturally presents numerous challenges for the acquisition process, but otherwise has the same result of a management team becoming the business’ new owners.
The challenges and drawbacks of an MBO
Despite their fundamental differences, MBOs and MBIs do share one major challenge: securing funding. While the members of an MBI team will generally be able to stump up some of their own capital, financing the full value of the deal will typically require some kind of outside financing. Securing this can be time-consuming and, post-acquisition, can mean that profits are impacted by debt repayments.
The fact that an MBI team is exterior to the target business means that, compared to an MBO, an MBI can pose some significant challenges. Firstly, due to being a third party, MBI teams may more often have to compete with other bidders, as opposed to MBOs, which often occur without the business ever being marketed for sale.
This can also pose a challenge during negotiations. In an MBO, the management team will have an existing relationship with the sellers, which can mean an element of trust that smooths out negotiations and due diligence. An MBI team, on the other hand, will likely be unknown to the sellers, meaning they will have to demonstrate their capabilities and necessitating a full sellers’ due diligence process.
Post-acquisition, an MBI team may also take somewhat longer to bed in than an MBO team. While they may have applicable sector and management experience, it can still take time for the new management to get to know the inner workings of the business and build relationships with the staff. This could slow initial growth and make the transition period less straightforward.
Providing that funding can be secured and a deal negotiated with the selling company, then an MBI can be a highly effective takeover method and one that has significant upsides for both buyer and seller.
If you have a group of business associates that you have previously worked with and trust, then an MBI can enable you to take on a company and rapidly begin targeting growth and higher profits, without the drawn out (and perhaps considerably riskier) process of starting a business from scratch.
For a seller, meanwhile, an MBI can represent the perfect opportunity to hand the business over to a highly experienced, trustworthy management team. If the sale of the business is constructed with significant earnouts based on future performance, then this might be preferable to an MBO involving a management team that may not have extensive experience of running a business.
In the case of a struggling business, an MBI that sees an incoming management team with detailed knowledge of the sector, experience running a business and new contacts and opportunities could turn the business around.
MBI financing options
The key part of the MBI process is arguably getting the funding in place to enable the deal. For teams looking to acquire a business via an MBI there are several financing options available. Commonly, MBOs are funding through debt and equity or some other form of hybrid financing.
Increasingly, specialist SME lenders are launching loans designed specifically to support MBIs at small and medium-sized firms. This has proven helpful in addressing a lack of funding for MBIs at SMEs in the UK.
Private equity financing is also frequent in MBI transactions, but, as in an MBO, will require extensive due diligence on the part of the private equity backer. Furthermore, private equity firms enter these kinds of transactions with a view to exiting a few years later, this not only means that their backing is finite, but also that there will be pressure for the business to deliver a significant return on their investment.
Finally, while perhaps less common than in an MBO, MBIs can also sometimes involve funding provided to the management team by the seller. This can be advantageous to both parties, firstly by potentially fast-tracking the acquisition process and secondly by reducing the up-front price for the buyer, while possible enabling the seller to gain a higher valuation through deferred payments.