Employee to Owner: Things to Consider in a MBO

It can be very exciting and a bit scary to take that leap from employee to owner. And for those of you who can do that via a management buy-out (MBO), there are some important things to consider.

1. Due Diligence

Management teams often think that since they were involved in the business, they are aware of all its strengths, weaknesses, opportunities and threats. But don’t fool yourself. Running the business is a lot different that contributing in the day to day work and there will be a lot of skeletons or challenges you will not have been a part of. When you take over the business in an MBO, you need to do a proper due diligence to limit your surprises and be able to put a plan in place to run the company under its new management.

2. Leadership

If everyone is buying in with the same amount of money, people often think that they are all the boss but we all know that doesn’t work. It’s important to determine who is the leader – who will make the tough decisions at the end of the day. If you don’t establish who is the leader “in charge,” you will be caught in a constant power struggle and your organization could suffer the consequences. Remember that roles & responsibilities should be established and remunerated accordingly; ownership is a separate compensation package.

3. Tax

Now is a great time to ensure that you have a tax effective structure in place. In addition, you should be giving consideration to tax due diligence, how you will fund the deal, what costs will be deductible, key man insurance, personal wills and shareholder agreements.

4. Shareholders Agreement

A shareholders agreement is vital to protect all new owners. Every “what if” scenario should be included (i.e. If someone gets sick, dies, is fired) as well as deciding what issues require the majority consent from the shareholders. In addition to these circumstances, you will need to determine how a shareholder can exit the business. It’s hard to think this far ahead but if you do, you will protect yourself and your business down the road.

5. Financing

Financing the MBO was likely one of your first concerns and with good reason. Many options exist from using your own equity, bank financing, vendor take backs or a combination of any of the above. Understanding the cash flows of the current business as well as your personal finances is a must.

All of this can be daunting so it’s critical that you bring in someone to help you look at your management buyout from an outside perspective. You may already know the upside of buying the business but you need an advisor to help you identify the risks and educate you on the potential pitfalls that you may face. An advisor can also help you find the right financial backers for your transaction. To get more in depth information on management buyouts, watch our webinar “All About Management Buyouts”, available for download now.

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There are many things to take into consideration before you do a management buyout. For more information, please contact Candace Enman at cenman@welchllp.com.

Candace Enman, CPA, CA
WelchGroup Consulting