MBO: How to go from manager to business owner

“What if I owned the company I work for?”

It’s a thought that occurs to many in management. After all, you know the business better than most people. You’re invested in its future and you have plenty of ideas. Wouldn’t it be great to gain equity for your efforts? Business ownership doesn’t have to be a pipe dream: 2023 was the third most active year for management buyouts on record, and this trend seems set to continue, with rising numbers of employees looking to become business owners.

Of course, there’s a lot of work leading up to such a transition. A good management buyout (MBO) takes months of negotiation, planning and fundraising – it’s not something to embark upon without having a clear idea of the steps involved. 
 
If an MBO seems like the way forward for you, here are the seven steps you need to consider:

1. Ask the big questions.

Before you decide that this is the way forwards, you need to do some soul searching and have an idea of answers to the following:

• “How much do I want this?” 
  Buying out a company means committing around a year’s gross salary. Whilst this can be borrowed, this is a notable commitment either way. Think carefully about how the company can grow, what you would gain through becoming the business owner, and whether you would thrive within business ownership. Whilst there are added rewards, the role comes with added pressure – be sure you know what you are looking to take on. 
   
• “When should I do it?” 
  The timing of a buyout needs to be right both for the company and yourself. Are your career and personal life in the right place? What is the current corporate climate like? Why is the current owner looking to sell? All of these are worth some serious thought. 
   
• “Who will be involved?” 
  It’s possible to buy out a company by yourself, but many MBOs are completed by management teams of two or more. Think about who would want to join you and what value they’d add. Would you feel confident co-owning with them?

2. Hire an adviser

Once looking at these questions yourself, it’s time for an expert opinion. It is always wise to get a corporate finance adviser in on an MBO from the start. This way, we can help you to work out your strategy, and can advise on whether now is the right time to act.

Throughout the management buyout process, an adviser can raise points you may not have considered. We’ll also kick off initial conversations with the current owner, helping you avoid any awkwardness or early mistakes. 

3. Create a business plan

Before you can raise any finance for your MBO, you will need to be able to present a solid business plan. Make sure that your plan has a strong executive summary, as financiers are likely to read your proposal quickly, rather than giving all of the details the length of attention you might want. The current owner will want to see your plan too: as well as being emotionally invested in the company, they may have a continuing financial interest in it (depending on how the buyout is structured). 
 
This plan isn’t just to impress others, though: it will also be essential for you once the buyout is complete.  

4. Reach an agreement

There are few people more nerve-wracking to negotiate with than your current employer. A corporate finance adviser can keep the discussion running smoothly: we can push back when needed, and can also deliver bad news for you, so things don’t get awkward in the office. An adviser will also help to correctly structure the deal. This includes setting out:

• How the buyout team will pay
• When and how ownership is transferred
• The responsibilities of the buyout team and seller after the deal is done

Having everything covered in the agreement safeguards you for the future and erases any uncertain grey areas.

5. Raise finance

Leave plenty of time to raise finance for the MBO. You’ll want to find a good deal, and you need to be careful of what terms you are accepting. Make sure that you know what strings and conditions come along with a financial offer: whether from a bank or venture capital firm, you’re choosing a long-term business partner. When in doubt, always seek the input of your corporate financial advisor before accepting an offer.

6. Do your research

Even though you feel familiar with this company, there are bound to be areas of its operations that you’re not 100% familiar with. As well as doing your own research, it’s crucial to get due diligence done by a professional. This will give peace of mind to your financiers, as it should raise any potential issues or opportunities before you go further and allows you to plan for any unexpected areas.

7. Close the deal
 
With a solid agreement and secure funding in place, you are ready to sign the contract and celebrate!  Enjoy the win – tomorrow, it’s time to knuckle down and run your own business.