Management Buy-In: A viable acquisition model?

In contrast to Management Buy-Outs (MBOs), Management Buy-Ins (MBIs) are a less frequent mode of acquisition. While this process presents notable challenges, under suitable circumstances, MBIs can be advantageous for all stakeholders involved: the incoming management team, the outgoing owners, the financiers of the deal, and the target company.

This article outlines the essence of an MBI, enumerates its merits, drawbacks, and hurdles, and expounds on the funding alternatives accessible to parties seeking to procure a business through an MBI.

Definition of an MBI
Unlike an MBO where the existing management team of a company purchases the business from its proprietors, an MBI entails an external management team assuming control. This fundamental distinction presents a series of challenges in the acquisition procedure, while ultimately achieving the same outcome of the management team becoming the fresh owners of the business.

Challenges and Disadvantages
Despite their inherent differences, MBOs and MBIs share a common major obstacle: securing funding. While members of an MBI team might contribute some of their personal capital, obtaining full funding for the deal typically necessitates external financial support. This pursuit can be time-intensive and, post-acquisition, might result in profit being impeded by debt repayment obligations.

The external nature of an MBI team in relation to the target company means that, compared to MBOs, MBIs can encounter significant challenges. Primarily, due to their third-party status, MBI teams may frequently have to compete with other potential acquirers, in contrast to MBOs which often transpire without the business undergoing a formal sale process.

This dynamic also presents a challenge during negotiation. In an MBO, the management team enjoys a pre-existing rapport with the sellers, fostering a level of trust that eases negotiations and due diligence. Conversely, an MBI team, being unfamiliar to the sellers, must demonstrate their competencies, prompting a thorough due diligence process on the sellers' part.

Post-acquisition, the integration of an MBI team might take more time than that of an MBO team. Despite possessing relevant industry and managerial experience, the new management still requires time to comprehend the company's internal mechanisms and establish rapport with the workforce. This could decelerate initial growth and complicate the transitional phase.

Given the successful procurement of funding and negotiation of terms with the selling company, an MBI can be a highly effective takeover strategy, benefiting both the buyer and the seller.

For individuals with a network of trusted business associates, an MBI can facilitate the acquisition of a company, enabling prompt pursuit of growth and enhanced profits, without the protracted and potentially riskier process of launching a business from scratch.

For sellers, an MBI offers the ideal opportunity to pass the reins to a capable, trustworthy management team. If the sale agreement incorporates substantial earnouts contingent on future performance, this might prove more favourable than an MBO involving a management team lacking extensive business management experience.

In the case of a struggling business, an MBI involving a proficient incoming management team armed with sector-specific knowledge, business management expertise, and fresh contacts could orchestrate a business revival.

MBI Funding Options
The crux of the MBI process arguably lies in securing the necessary funding for the transaction. Teams aspiring to acquire a business through an MBI have various funding avenues at their disposal. Commonly, MBOs are financed through a combination of debt, equity, or hybrid financing arrangements.

Increasingly, specialised small and medium-sized enterprise (SME) lenders are introducing loans tailored to support MBIs within the realm of SMEs. This initiative addresses the dearth of funding options for SME-focused MBIs, particularly in the UK.

Private equity financing is also prevalent in MBI transactions. However, akin to MBOs, this route demands extensive due diligence on the part of the private equity investor. Additionally, private equity firms enter such transactions with the intent of exiting after a few years. Consequently, their support is finite, and they exert pressure on the business to yield substantial returns on their investment.

Lastly, although less common than in MBOs, MBIs can occasionally involve funding provided to the management team by the seller. This approach can benefit both parties by potentially expediting the acquisition process and lowering the upfront cost for the buyer. Simultaneously, it might enable the seller to attain a higher valuation through deferred payments.