Management buyouts are on the rise, with business owners turning inwards to protect their legacies. BETHANY WALES found out why preserving their reputation has become a priority for directors.
Soaring borrowing rates, economic uncertainty, rising costs in just about every area of business - it's not hard to see why people are feeling a tad nervous about adding a new company to their line-up.
And with outside buyers more risk averse than at any other point in the past two decades, business owners looking to sell are turning to their management teams for a solution.
The premise of a management buyout (MBO) is simple: they occur when a team of managers and executives work together to buy a business, or part of a business, which they work for.
They first gained traction in the early 1970s, when a decline in the stock market triggered a surge in small firms scrambling to buy back their publicly owned shares.
READ MORE: Why its never been harder to sell a business
By the 1980s they were a mainstay of business economics, lorded for benefits including speed of sale, alignment of interests, and a closer relationship between management and ownership.
But while these factors have all helped to fuel the recent rise in this type of deal, some people believe it might also hint at something deeper happening in the world of business.
THE SUCCESSION EFFECT
James Groves, managing director of Norwich-based energy consultancy firm Indigo Swan, said he believes the uptick in MBOs could be down to something more sentimental: the desire to leave a legacy.
He and four other managers bought the firm in 2022, after the former-owners decided they were ready to pursue other projects.
But despite being ready to move on, he said they were keen to preserve the reputation they had built for the business.
He said: “For a lot of owners there's an element of protecting their legacy.
“If you sell it to your management team then you can have a high level of confidence that what you’ve built will stay intact, and I think that’s why they’re becoming so popular.
“You can maybe make more selling to competitors but then there isn’t the guarantee that what you created will continue in the way you wanted it to.”
Matt Watts, an owner at the Norfolk bike shop chain Pedal Revolution, agreed.
He and three other store managers purchased the business last year, taking over from the former owners who had been in place for more than 30 years.
He said the MBO was motivated by a desire to keep the business independent.
“They wanted to keep it local and independent, so rather than putting it on the market and risk it being bought by a bigger brand and swallowed up, they asked us to come in.
“More and more people want to deal with indie businesses rather than massive corporations that don’t treat you as an individual.
“In Norfolk you can see how true that is. It’s the high quality independent stores that offer a personal service that are thriving.”
ECONOMIC UNCERTAINTY FUELLING MBOs
Research shows the number of MBOs tends to increase during economic uncertainty.
That's because while outside buyers tend to want to hang on to their cash, internal management teams have greater insight into their business’s strength than outside buyers.
This helps them to strike while the iron’s hot and, with less competition, secure a better final price.
MBOs can also facilitate flexible funding deals, with buyers able to pay for the buyout over a number of years, meaning they can avoid taking out expensive bank loans.
For sellers, this type of deal helps them to bypass the increasingly slow process of finding a buyer.
MBOs tend to be quicker and less likely to fall through than a regular sale - a welcome piece of certainty in an uncertain climate.
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